n 


GIFT  OF 


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The  National  City  Company 

National  Citv  Bank  Building 


Digitized  by  the  Internet  Archive 
in  2008  with  funding  from    . 
IVIicrosoft  Corporation 


http://www.archive.org/details/digestoffederalrOOnatirich 


DIGEST 

OF  . 

REVENUE  ACT  OF   1918 

FOR 

INCOME  AND  EXCESS 
PROFITS  TAXES 


With  tables  for  Calculation  of  Tax  and 
Chart  of  War  Excess  Profits  Tax  Zones 


^^A  Passed  House  Reps.  Feb.  8,  .1919 
(  Passed  Senate  Feb.  13,  1919 


The  National  City  Company 
Natiokae~"Ctty  Bank— Btfit-^fNG — 


New  York,  1919 


Copyright,  1919,  by 
The  National  City  Company 


Foreword 

THE  information  contained  in  this  booklet  is  believed  to  be  accurate; 
but  it  has  been  compiled  in  advance  of  any  official  interpretation  of 
the  Revenue  Act  of  1918  by  the  Treasury  Department. 

In  view  of  the  desire  and  necessity  for  immediate  information 
concerning  these  taxes,  however,  this  booklet  is  published  in  the  hope 
that  taxpayers  may  be  able  to  gain  therefrom  a  fair  general  idea  of  the 
provisions  of  the  Act  relating  to  taxes  on  income. 

What  is  the  Revenue  Act  of  1918? 
What  is  my  liability  under  this  statute? 

How,  when,  and  where  shall  I  comply  with  the  requirements  of  the 
statute? 

What  are  its  requirements  in  my  case  particularly? 


This  pamphlet  gives  the  answer. 

In  time,  the  Treasury  Department  will  answer  the  above  questions. 
The  statute  fixes  the  time  in  which  returns  of  income  for  the  calendar 
year  1918  must  be  filed  as,  ''on  or  before  March  15,  1919."* 

The  Secretary  of  the  Treasury  has  stated  that  every  person 
required  to  make  returns  of  income  for  the  purpose  of  1918  tax,  must 
do  so  within  the  time  fixed  by  the  statute;  that  if  he  is  not  entirely 
ready  to  do  this  or  has  any  doubts  as  to  the  details  of  the  statute's 
requirements,  he  must  nevertheless  make  some  statement  or  return 
and  ci^rrect  it  later,  if  it  should  be  incorrect. 

If  your  guess  causes  you  to  pay  less  than  you  should,  even  though 
the  mistake  is  honestly  made,  the  statute  penalizes  you.     If  you  pay 
too  much,  you  get  your  money  back  some  time  (if  you  make  a  claim 
for  refund  within  five  years) ,  or  you  may  have  it  credited  against  some 
other  tax  which  you  may  owe  some  other  time. 

It  is  the  desire  of  the  National  City  Company  to  assist  the  Govern- 
ment and  taxpayers  by  making  it  possible  that  those  who  seek  the  Com- 
pany's assistance,  may^now — correctly  state  the  facts  of  their  income 
and  tax  thereon,  whether  the  return  forms  which  are  now  in  preparation 
by  the  Government  are  in  hand  or  not,  and  thus  avoid  the  time,  ex- 
pense and  annoyance  involved  in  corrections. 

This  pamphlet  tells  you  how.  If  you  follow  it,  the  making  of 
your  return  should  be  simply  a  matter  of  transferring  figures  to  the 
Government  blank.  If  you  are  in  tax  trouble — don't  worry — tell  it 
to  the  TAX  DEPARTMENT  of  the  National  City  Company. 

The  National  City  Company. 


"Note. — See  page  4. 


QOOC'^/I 


Note:— 

As  we  are  going:  to  press  we  are  advised  of  the  following  ruling  by  the  Com- 
missioner: 

••Re:    EXTENSION  OF  TIME  FOR  FILING  RETURNS. 

"Treasury  Department, 
"Office  of  Commissioner  of  Internal  Revenue, 
"Washington,  D.  C. 

"TO  COLLECTORS  OF  INTERNAL  REVENUE  AND  OTHERS  CONCERNED: 

••Although  no  general  extension  of  time  will  be  authorized  for  filing  Federal 
Income  Tax  returns  due  March  15,  the  Commissioner  of  Internal  Revenue  h%s 
approved  a  novel  feature  of  tax  collection  which  will  serve  for  all  practical  pur- 
poses ap  a  possible  extension  of  forty-five  days  for  the  filing  of  corporation  income 
and  excess  profits  tax  returns  in  cases  where  corporations  are  unable  to  complete 
and  file  their  returns  of  March  15. 

"If  a  corporation  finds  that,  for  good  and  sufllcient  reason,  it  is  impossible  to 
complete  its  return  by  March  15,  it  may  make  a  return  of  the  estimated  tax  due 
and  make  payment  thereof  not  later  than  March  15.  If  meritorious  reason  is  shown 
why  the  corporation  is  unab'.e  to  complete  its  return  by  the  specified  date,  the  Col- 
lector will  accept  the  payment  of  the  estimated  tax  and  agree  to  accept  the  revised 
and  completed  tax  return  within  a  period  of  not  more  than  45  days. 

"Under  the  plan  adopted  for  corporation  payments  and  returns,  the  Government 
will  be  able  to  collect  approximately  the  amount  of  tax  due  on  or  before  March  15, 
thus  meeting  its  urgent  needs,  and  corporations  actually  requiring  further  time  for 
the  preparation  of  their  complete  returns  will  be  granted  ample  time  in  which  to 
do  so. 

•'One  of  the  advantages  of  this  plan  is  that  it  relieves  the  taxpayer  of  one-half 
of  one  per  cent  interest  per  month  that  would  be  attached  to  the  payment  of  the 
taxes  under  an  extension  granted  at  the  request  of  the  taxpayer.  The  taxpayer 
will,  of  course,  not  be  relieved  of  interest  on  such  amount  as  his  payment  may  fall 
short  of  the  tax  found  later  to  be  due  on  the  basis  of  his  final  return. 

•'Should  the  payment  on  March  15  of  the  estimated  tax  due  be  greater  than  the 
tax  eventually  found  to  be  due  on  examination  of  the  completed  return,  the  excess 
payment  will  automatically  be  credited  to  the  next  installment  which  will  be  due 
on  June  15. 

••Provision  for  systematically  handling  this  new  feature  will  be  made  in  the 
construction  of  the  new  return  blanks  for  corporations.  The  new  form  will  be  a 
combined  income  and  excess  profits  blank,  embodied  in  which  is  a  detachable  letter 
of  remittance.  Any  corporation  which  finds  that,  for  suflficient  reasons,  it  cannot 
complete  its  return  by  March  15,  may  detach  and  fill  out  the  letter  of  remittance, 
and  forward  same  to  the  collector  on  or  before  March  15.  together  with  a  check, 
money-order  or  draft  for  the  tax  due  on  that  date.  If  the  exact  tax  is  not  known, 
the  estimated  tax  due  will  be  paid  in  this  manner.  A  statement  in  writing  of  the 
reasons  why  it  is  impossible  for  the  corporation  to  complete  the  return  by  the 
specified  date  must  accompany  every  such  remittance. 

"Individual  taxpayers  will  be  given  similar  privileges  in  cases  in  which  it  is 
made  clear  by  the  taxpayer  that  the  time  available  is  not  suflicient  to  enable  him 
to  complete  his  return  by  March  15.  No  reason  exists,  according  to  the  Internal 
Revenue  officials  for  delaying  the  filing  of  the  returns  of  individual  incomes,  except 
In  unusually  difficult  cases. 

"Forms  for  returns  of  individual  incomes  up  to  $5,000  will  be  distributed  by 
cpllectors  within  a  few  days.  Forms  for  larger  incomes  will  be  available  about 
February  24.  Corporation  blanks  will  be  distributed  by  March  1.  Regulations  gov- 
«rninK  the  administration  of  the  new  Income  Tax  will  also  be  available  before 
March  1. 

"DANIEL   C.    ROPER, 
"Commissioner    of    Internal    Revenue." 


I 


CONTENTS 


I. 

DEFINITIONS Pages  9  to  16 

INCOME  TAX  Paragraph 

Exempt  income 1-21 

Income  of  non-resident  aliens 22-  27 

Income,  definition- 28-  31 

Gross  income        32-  38 

Net  income 39-  41 

Returns  of  income •  .  42-  94 

Titles  of  taxes 95-128 

Deductions      .      .      .      .      .      .      .  ■    .      .      .      .      .      .  129-162 

Content  of  individual  return 163-166 

Pannership  return 167 

Fiduciary  retiuTi  and  tax 168-171 

Corporation 

Income  and  deductions 172-198 

Credits — 

Against  income  and  tax    ....;..  199-206 

Returns,  single  and  consolidated 207-211 

Payment,  withholding  or  collection  of  tax  at  the  sour'-o  212-232 

Payment  of  tax 233-234 

Penalties 235-241 

Inf onnation  at  source      .      .      . 242-245 

Foreign  items 246-247 

Possessions  of  the  United-  States 248-250 

Exempt  corporations 251-264 

n. 

WAR-EXCESS  PROFITS  TAX 

Definitions  and  rates 265-279 

Credits — 

Excess  profits,  war  profits         280-290 

Tax  on  combination  of  income 291-292 

Average  pre-war  net  income 293-294 

5 


Paragraph 

Invested  capital,  computation  of 295-298 

Adjustment  of  invested  capital 299-302 

Form  of  balance  sheet     . 302 

Tax  on  basis  of  representative  corporations    ....  303-309 

Reorganizations          .      .      .     .      .      .     .      .      .      .      .  310-313 

Tax  for  fiscal  year  with  different  rates 314-318 

Pa3niient  of  tax 319 

Maximimi  tax  on  profits  from  sale  of  mines,  oil  or  gas 

wells 320 

in. 

Page 
CHARTS  AND  TABLES 

1.  Table  I.   Individual  Normal  and  Surtax  and  Per- 
centages, 1918 75 

2.  Table  II.    Individual  Normal  and  Surtax  and  Per- 
centages, 1919 78 

3.  Table  III.  Surtaxes  1913-15,  1916,  1917  and  illus- 
tration of  calculation  of  tax  on  allocated  income     .  80 

4.  Chart  of  Tax  Zones 83 

5.  Table  IV.    Decimal  Table  for  Calculation  of  War- 
Excess  Profits  Tax   84 

6.  Table  V.    Maximum  Tax  on  Various  Incomes        .  S8 


Index  to  Definitions 

{References  are  to  pages) 


Act  of  1916 9 

Act  of   1917 9 

Business 9 

Collector     9 

Commissioner    9 

Corporation  9 

Dividend     9 

Domestic    10 

Fiduciary 10 

Fiscal   year   10 

Fiscal  year  with  different  rates  of  tax  10 

Gain  or  loss    10 

Gain  or  loss  on  exchange  of  property.   11 

Government   contract,    means 11 

Inventory   11 

Life   insurance   company 12 

Loss   12 

Losses    12 

Military  or  naval  forces  of  the  U.  S .  12 


Pack 

Net  loss 12 

Taxpayer    13 

"Paid  or  incurred"  and  "Paid  or  ac- 
crued"   14 

Person 14 

Personal  service  corporation 14 

Possessions  of  U.  S 14 

Present  war   14 

Profit 14 

Reserve  fund  required  by  law 14 

Secretary    14 

Stock  dividend    14 

Taxable  year 15 

Taxable    year   1918 15 

Taxpayer    15 

Trade    15 

United   States 16 

Withholding-    agent 16 


Index  to  Income  Tax 


{Each  paragraph  has  been  numbered 

Par. 
Adjustment     of     tax    when    accrual 

basis   used 166 

Citizens  of  possessions  of  U.  S., 

48,  248-250 
Corporation   income: 

Computation  of...... 110,  172-173 

Credits  against. 108-111,  200-202,  135-153 
Excess  or  War  Profits  tax  on..  123-128 

Exemptions     of 251-264 

Information  at  source 242,   244-245 

Items  not  included  in 6-20 

Rates  of  tax  on 112-113 

Tax    on 107 

Withholding    217,    219-228 

Credits-  allowed: 

Against  gross  income: 

Contributions  or  gifts.... 153 

Debts    149 

Depletion,   depreciation  of  mines, 

etc 152 

Exhaustion,  wear,  etc 150 

Expenses     135-137 

Interest    138 

Losses    145-148 

Partnership     73-76 

Property   for   prosecution   of   war.   151 

Taxes •  .140-144 

Against   income   for  normal   indi- 
vidual  tax 164 

Against  net  income: 

Amount  of  Excess  or  War  Profits 
tax  for  same  taxable  year, 

109-110,   201 

Interest    108,  200 

Of  domestic  corporation Ill,   202 

Against   tax 165,    203-206 

Explanation  of 130-133 

Deductions: 

Definition. 129-133 

Items  allowable: 

Amounts  from  insurance 188-191 

Debts .183 

Depletion  and  depreciation. ....."  187 

Dividends 184 

Exhaustion,  wear  and  tear 185 

Expenses 174 

Foreign  corporation. *  .  198 


and  references  are  to  these  numbers) 

Par. 

Interest  175 

Losses   : 182 

Non-resident  aliens,    returns 157 

Property  for  prosecution  of  war.  186 
Special  losses  on  inventories, 

155-156,  192-197 

Taxes    176-181 

Withholding    221-228 

Items   not   allowable 158-162,  199 

Dividends: 

Deductions  allowed 184 

Of  personal  service  corporations. .     76 

Payment  at  source 242 

Tax  on 38 

Estates  and  Trusts: 

Fiduciary   responsibilities 169 

Periodical  distributions 170 

When  taxed  as  for  individuals 168 

Exemptions: 

For  corporate  income 251-264 

For  domestic  income   Ill 

Specific .99-103 

Excess  and  War  Profits  Tax  on  in- 
come   123 

Foreign   items    246-250 

Gross  income: 

Items  included  32-37 

Of  corporations  172-173 

Income: 

Classes  subject  to  tax 23-41 

Definitions  of  3,  28-31 

Items  not  included 6-21 

Information  at  source,  statement  of: 

Brokers  : 243 

Other  cases  , .244-245 

Payment  of  dividends 242 

Net  income:  - 

Credits  allowed  against  108-111,  200-2D2 

Of  corporations 172l 

Tax  on  ............. 39v«l,  46-47 

Nonresident  aliens:       .  ■      -^  .  -     -  ^ 

Computation  of  income  ......;...!     22 

Deductions  allowed  .........  ,.wl39,n57 

Payment  at  source ; .,  .',222 

Returns  of .i ; ... .'.     50 

Subject  to  normal  tax .....220-222 

Withholdings    of ., .  .^  .  w . .>222 


f 


Paragraph 

Invested  capital,  computation  of ^     .  295-298 

Adjustment  of  invested  capital 299-302 

Form  of  balance  sheet     . 302 

Tax  on  basis  of  representative  corporations    ....  303-309 

Reorganizations          .      .      .      .      .      .     .      .      .      .      .  310-313 

Tax  for  fiscal  year  with  different  rates 314-318 

Payment  of  tax 319 

Maximimi  tax  on  profits  from  sale  of  mines,  oil  or  gas 

wells 320 

m. 

Page 
CHARTS  AND  TABLES 

1.  Table  I.   Individual  Normal  and  Surtax  and  Per- 
centages, 1918 .     .     .  75 

2.  Table  II.    Individual  Normal  and  Surtax  and  Per- 
centages, 1919 78 

3.  Table  III.  Surtaxes  1913-15,  1916,  1917  and  illus- 
tration of  calculation  of  tax  on  allocated  income     .  80 

4.  Chart  of  Tax  Zones 83 

5.  Table  IV.    Decimal  Table  for  Calculation  of  War- 
Excess  Profits  Tax   84 

6.  Table  V.    Maximum  Tax  on  Various  Incomes        .  SS 


^^-  .      ^  ,.:o:a 


Index  to  Definitions    . 

{References  are  to  pages) 


Pagw 

Act  of  1916 9 

Act  of   1917 9 

Business 9 

Collector     9 

Commissioner    9 

Corporation  9 

Dividend     9 

Domestic    10 

Fiduciary   10 

Fiscal  year   10 

Fiscal  year  with  different  rates  of  tax  10 

Gain  or  loss    10 

Gain  or  loss  on  exchange  of  property.  11 

Government   contract,    means 11 

Inventory   11 

Life    insurance    company 12 

Loss   12 

Losses    12 

Military  or  naval  forces  of  the  U.  S.  12 


Net  loss 12 

Taxpayer    13 

"Paid  or  incurred"  and  "Paid  or  ac- 
crued"      , , . ,  14 

Person 14 

Personal  service  corporation 14 

Possessions  of  U.  S 14 

Present  war   14 

Profit  14 

Reserve  fund  required  by  law 14 

Secretary    14 

Stock  dividend    14 

Taxable  year 15 

Taxable    year   1918 15 

Taxpayer    15 

Trade    15 

United   States 16 

Withholding-    agent 16 


Index  to  Income  Tax 


{Each  paragraph. has  been  numbered 

Pai^i 
Adjustment     of     tax     when    accrual 

basis   used 166 

Citizens  of  possessions  of  U.  S., 

48,  248-250 
Corporation   income: 

Computation  of •. 110,  172-173 

Credits  against.  108-111,  200-202,  135-153 
Excess  or  War  Profits  lax  on..  123-128 

Exemptions    of 251-264 

Information  at  source 242,   244-245 

Items  not  included  in 6-20 

Rates  of  tax  on 112-113 

Tax    on 107 

Withholding    217,   219-228 

Credits  allowed: 

Against  gross  income: 

Contributions  or  gifts 153 

Debts    149 

Depletion,   depreciation  of  mines, 

etc 152 

Exhaustion,  wear,  etc 150 

Expenses     135-137 

Interest    138 

Losses    145-148 

Partnership     73-76 

Property  for  prosecution   of  war.  151 

Taxes     140-144 

Against    income    for  normal    indi- 
vidual  tax 164 

Against  net  income: 

Amount  of  Excess  or  War  Profits 
tax  for  same  taxable  year, 

109-110,   201 

Interest    108,  200 

Of  domestic  corporation Ill,   202 

Against    tax 165,    203-206 

Explanation  of    ..130-13B 

Deductions: 

Definition- ,. 129-133 

Items  allowable: 

Amounts  from  insurance 188-191 

Debts .183 

P  Depletion  and  depreciation.. 187 

Dividends 184 

Exhaustion,  wear  and  tear 185 

Expenses 174 

Foreign  corporation. .- .  198 


and  references  are  to  these  numbers) 

Par. 

Interest  175 

Losses   ; 182 

Non-resident   aliens,    returns 157 

Property  for  prosecution  of  war.  186 
Special  losses  on  inventories, 

155-156,  192-197 

Taxes    176-181 

Withholding    221-228 

Items   not   allowable 158-162,  199 

Dividends: 

Deductions  allowed 184 

Of  personal  service  corporations. .     76 

Payment  at  source 242 

Tax  on 38 

Estates  and  Trusts: 

Fiduciary   responsibilities 169 

Periodical  distributions 170 

When  taxed  as  for  individuals 168 

Exemptions: 

For  corporate  income 251-264 

For  domestic  income   Ill 

Specific    99-103 

Excess  and  War  Profits  Tax  on  in- 
come   123 

Foreign   items    246-250 

Gross  income: 

Items  included 32-37 

Of  corporations  172-173 

Income: 

Classes  subject  to  tax 23-41 

Definitions  of  3,  28-31 

Items  not  included 6-21 

Information  at  source,  statement  of: 

Brokers   : » 243 

Other  cases .244-245 

Payment  of  dividends 242i' 

Net  incoftie:  - 

Credits  allowed  againat  108-111,  200-202 

Of  corporations  V .....  1721 

"Tax  on 39-41,  46-47 

Nonresident  aliens:  :        ^ 

Computation  of  income 52 

Deductions  allowed .i.  139,1157 

Payment  at  source , , . ,  222 

Returns  of .....; ... .  =.     50 

Subfect  to  normal  tax w. ...  220-^222 

Withholdings    of .,  .  .m  .w\:.^22 


f 


10  Definitions 


distribution  made  during  the  remainder  of  the  taxable  year 
snail  be  deemed  to  have  been  made  from  earnings  or  profits 
accumulated  between  the  close  of  the  preceding  taxable  year 
and  the  date  of  distribution,  to  the  extent  of  such  earnings 
or  profits,  and  if  the  books  of  the  corporation  do  not  show  the 
amount  of  such  earnings  or  profits  the  earnings  or  profits  for 
the  accounting  period  within  which  the  distribution  was  made 
shall  be  deemed  to  have  been  accumulated  ratably  during  such 
period. 
Dividend:  From  what  fund  payable:    Earnings  or  profits  only.   Dis- 
tributions in  liquidation  of  corpofations  are  not  dividends,  foy  the 
purpose  of  the  Income  Tax.     They  are  to  be  treated  as  payments 
in  exchange  for  stock  or  shares,  and  any  gain  or  profit  realized 
thereby  shall  be  taxed  to  the  recipient  or  distributee  thereof,  as 
other  gains  or  profits  are  taxed. 
Dividend:    Personal   Service   Corporation.     Any   distribution  made 
by  such  a  corporation  to  its  shareholders  or  members  out  of  its 
earnings  or  profits  accumulated  between  February  28,  1913,  and 
January  1,  1918,  whether  in  cash  or  in  other  property  or  in  stock 
of  the  corporation.     It  (except  in  the  case  of  stock  dividend  re- 
ceived in  1918)  t  shall  be  taxed  to  the  recipient  thereof  at  the  rate 
or  rates  applicable  to  such  income  for  such  recipient  for  1918 — 
when  received  in  1918 — and  when  received  in  subsequent  years  it 
shall  be  taxed  to  such  recipient  at  the  rate  or  rates  which  shall 
prevail  as  for  the  year  of  receipt. 
Domestic:  When    applied   to   a   corporation   or   partnership   means 

created  or  organized  in  the  United  States. 
Fiduciary:  A  guardian,  trustee,   executor,   administrator,   receiver, 
conservator,  or  any  person  acting  in  any  fiduciary  capacity  for  any 
person,  trust  or  society.     For  the  purposes  of  the  Income  Tax 
"fiduciary"  does  not  apply  to  corporations.    . 
Fiscal  Year:  An  accounting  period  of  twelve  months  ending  on  the 

last  day  of  any  month  other  than  December. 
Fiscal  Years  with  Different  Rates  of  Tax:  Where  a  fiscal  year  begins 
in  a  calendar  year  having  rates  of  tax  differing  from  rates  which 
obtain  for  the  calendar  year  in  which  said  fiscal  year  ends,  the 
rates  of  the  first  calendar  year  shall  apply  to  that  proportion  of 
the  net  income  of  the  fiscal  year,  which  the  fraction  of  such  first 
calendar  year  (within  the  fiscal  year)  is  of  the  whole  of  such 
calendar  year,  and  the  rates  for  the  calendar  year  in  which  the 
fiscal  year  ends  shall  apply  to  the  remainder  of  such  income. 
Gain  or  Loss:  Basis  for  determining.  A  comparison  between  values 
— fair  market  price  or  value  as  of  March  1,  1913  (where  the  prop- 
erty, whose  value  is  presently  in  question,  was  acquired  prior  to 
that  date)  and  the  value  of  such  property  at  the  time  of  determina- 
tion of  value  for  present  purposes;  and  when  such  property  was 
acquired  subsequent  to  March  1,  1913,  then  the  basis  of  compari- 
Bon  with  present  value  shall  be  cost  of  the  property  at  the  time 


fSee  "Stock  Dividend." 


Definitions  ii 


it  was  acquired.  Gain  or  loss  is  determinable  only  on  a  sale  or 
such  other  disposition  of  property  as  will  effect  a  transfer  of  title 
to  the  property.  An  excess  of  sales  price  over  purchase  price 
shows  a  gain  in  the  amount  of  the  excess;  the  reverse  shows  and 
measures  the  amount  of  a  loss. 
Gain  or  Loss  on  Exchange  of  Property: 

When  property  is  exchanged  for  other  property,  the  property 
received  in  exchange  shall,  for  the  purpose  of  determining  gain 
or  loss,  be  treated  as  the  equivalent  of  cash  to  the  amount  .of  its 
fair  market  value,  if  any. 

When  in  connection  with  a  reorganization,  merger  or  consoli- 
dation of  a  corporation  a  person  receives  in  place  of  stock  or  securi- 
ties owned  by  him,  new  stock  or  securities  of  no  greater  aggregate 
par  or  face  value,  no  gain  or  loss  shall  be  deemed  to  occur  from  the 
exchange.  In  such  case  the  new  stock  or  securities  received  shall 
be  treated  as  taking  the  place  of  the  stock,  securities  or  property 
exchanged. 

When  in  the  case  of  any  such  reorganization,  merger  or  consoli- 
dation the  aggregate  par  or  face  value  of  the  new  stock  or  securi- 
ties received  is  in  excess  of  the  aggregate  par  or  face  value  of  the 
sto.ck  or  securities  exchanged,  a  like  amount  in  par  or  face  value 
of  the  new  stock  or  securities  received  shall  be  treated  as  taking 
the  place  of  the  stock  or  securities  exchanged.  The  amount  of  the 
excess  (in  par  or  face  value)  shall  be  treated  as  a  gain  to  the 
extent  that  the  fair  market  value  of  the  nOv  stock  or  securities 
is  greater  than  the  cost  (or  if  acquired  prior  to  March  1,  1913,  the 
fair  market  value  as  of  that  date)  of  the  stock  or  securities 
exchanged. 
Government  Contract,  Means: 

(a)  A  contract  made  with  the  United  States,  or  with  any  Depart- 
ment, Bureau,  Officer,  Commission,  Board,  or  Agency,  under 
the  United  States  and  acting  in  its  behalf,  or  with  any  agency 
controlled  by  any  of  the  above  if  the  contract  is  for  the  benefit 
of  the  United  States,  or 

(b)  A  subcontract  made  with  a  contractor  performing  such  a  con- 
tract if  the  products  or  services  to  be  furnished  under  the 
subcontract  are  for  the  benefit  of  the  United  States. 

The  term  "Government  Contract  or  Contracts  made  between 
April  6,  1917,  and  November  11,  1918,  both  dates  inclusive,"  when 
applied  to  a  contract  of  the  kind  referred  to  in  clause  (a),  includes 
all  such  contracts  which,  although  entered  into  during  such 
period,  were  originally  not  enforceable,  but  which  have  been  or 
may  become  enforceable  by  reason  of  subsequent  validation  in 
pursuance  of  law. 
Inventory:  A  list  of  articles  (material  thing  or  class  of  things)  with 
a  valuation  in  detail  thereof.  "Inventory"  as  used  in  connection 
with  the  Income  Tax  Law  relates  to  some  showing  of  present  value 
in  comparison  with  some  previous  value.  Inventories  may  be  used 
when,  and  in  such  manner  as,  the  Commissioner  of  Internal  Reve- 


12  Definitions 


nue  shall,  by  regulation,  prescribe  as  conforming  as  nearly  as 
may  be  to  the  best  accounting  practice  in  the  trade  or  business 
represented  and  as  most  clearly  reflecting  the  income. 

Life  Insurance  Company:  Means  an  insurance  company  engaged  in 
the  business  of  issuing  life  insurance  and  annuity  contracts  (in- 
cluding contracts  of  combined  life,  health  and  accident  insurance 
continuing  for  the  life  of  the  insured  and  not  subject  to  cancella- 
tion by  the  Company),  whose  reserve  funds  held  for  the  fulfillment 
of  such  contracts  comprise  more  than  fifty  percentum  of  its  total 
reserve  fund.  • 

Loss:  The  difference  between  selling  price  and  cost,  where  the  selling 
price  is  less  than  cost.  The  losses  comprehended  by  the  statute 
are  locses  of  capital,  which  in  the  meaning  of  the  statute  are 
properly  deducted  from  receipts  of  income  in  estimating  net 
income.  Loss  by  depreciation,  depletion  or  obsolescence  is  other- 
v/ise  provided  for. 

Losses:  Provided  to  be  taken  as  deductions  in  a  return  of  income 
by  Section  214  are  those  which  are  sustained  during  the  taxable 
year  and  which  are  not  compensated  for  by  insurance  or  other- 
wise, to  wit: 

(Paragraph  4)  If  incurred  in  trade  or  business. 
(Paragraph  5)  If  incurred  in  any  transaction  entered  into  for 
profit,  though  not  connected  with  the  trade  or  business. 

(Paragraph  6)  Of  property  not  connected  with  the  trade  or 
business,  if  arising  from  fires,  storms,  shipwreck  or  other  casual- 
ties, or  from  theft. 

In  the  case  of  non-resident  aliens,  the  transaction  must  be  in  the 
United  States  or  the  property  be  located  in  the  United  States. 

Military  or  Naval  Forces  of  the  United  States:  Includes  the  Marine 
Corps,  the  Coast  Guard,  the  Army  Nurse  Corps,  female^  and  the 
Navy  Nurse  Corps,  female,  and  such  other  units  as  are  otherwise 
included  within  the  term  defined. 

Net  Loss:  The  excess  of  deductions  allowed  by  law  (not  including 
dividends  received,  allowed  as  a  deduction  in  case  of  corporations) 
over  the  sum  of  gross  income  as  reported  in  a  return  of  income 
phis  interest  received  free  from  taxation  both  for  Income  Tax  and 
War  Excess  Profits  Tax. 

The  interest  which  is  free  from  both  these  taxes  is: 

(a)  Interest  on  United  States  bonds  other  than  Liberty  Bonds; 

(b)  Interest  from  Liberty  Bonds  assignable  to  that  propor- 
tion of  capital  invested  in  Liberty  Bonds  the  income  from 
which  is  entirely  exempted  from  surtax  to  individuals' 
and  excess  profits  tax  to  corporations; 

(c)  Interest  on  State,  County  and  Municipal  Bonds; 

(d)  Interest  on  Federal  Land  Bank  or  Joint  Stock  Land  Bank 
Bonds; 

(e)  Interest  on  United  States  territorial  bonds  and  bonds 
issued  by  the  possessions  of  the  United  States  which,  by 


Definitions  13 


law,  is  made  exempt  from  taxation  by  the  United  States 
Government, 
(f)  In  the  case  of  corporations,  dividends  received  by  them 
on  stock  of  other  corporations  whose  income  is  subject 
to  United  States  tax. 
Net  Loss  refers  to  two  classes  of  loss  only, 

(a)  To  net  losses  resulting-  from  the  operation  of  any  business 
regularly  carried  on  by  the  taxpayer; 

(b)  To  net  losses  resulting  from  bona  fide  sale  by  the  tax- 
payer of 

Plant 
Buildings 
Machinery 
Equipment 
Or  other  facilities 
constructed,  installed  or  acquired  by  the  taxpayer  on  or  after  April 
6,  1917,  for  the  production  of  articles  contributing  to  the  prosecu- 
tion of  the  war  with  Germany. 

Net  Loss  is  deductible  in  a  return  of  income  as  follows: 

Within  five  years  from  the  date  the  return  of  income  was 
due — where,  in  the  case  of  a  taxable  year  beginning  after 
October  31,  1918,  and  ending  prior  to  January  1,  1920,  it 
appears  from  evidence  satisfactory  to  the  Commissioner 
that  any  taxpayer  has  sustained  a  net  loss,  the  amount 
of  such  net  loss  shall — under  regulations  prescribed  by 
the  Commissioner — be  deducted  from  the  net  income  of 
the  taxpayer  for  the  preceding  taxable  year,  and  the 
Income  Tax  and  Excess  Profits  Tax  for  such  preceding 
taxable  year  shall  be  redetermined  accordingly.  Any 
amount  found  to  be  due  to  the  taxpayer  on  the  basis  of 
such  redetermination  shall  be  credited  against  any  In- 
come, War  Profits  or  Excess  Profits  Tax,  or  any  install- 
ment thereof,  then  due  from  the  taxpayer  on  any  other 
return,  and  any  balance  of  such  excess  shall  be  immedi- 
ately refunded  to  the  taxpayer;  e.  g.,  a  net  loss  ascer- 
tained on  the  return  of  income  for  1919,  shall  be  deducted 
from  the  net  income  of  1918,  and  the  total  tax  on  income 
of  1918  shall  be  redetermined  accordingly  and  the  amount 
of  the  Excess  Tax  paid  on  1918  income,  as  shown  by  this 
redetermination,  shall  be  credited  against  the  total  tax, 
or  any  installment  thereof,  then  due  on  1919  income 
and  any  balance  of  such  excess  shall  be  immediately 
refunded  to  the  taxpayer — and  so  on  for  succeeding  years. 
Taxpayer,  within  the  meaning  of  the  provision  for  "net  loss"  includes 
individuals  in  business,  beneficiaries  of  trusts  or  estates  to  which 
net  losses  have  accrued,  members  of  partnerships  to  which  net 
losses  have  accrued,  and  corporations  or  associations  to  which  net 
losses  have  accrued. 


14  Definitions 


"Paid  or  Incurred " 

and 

"Paid  or  Accrued'*:  These  terms  are  to  be  construed  according  to 
the  method  of  accounting  upon  the  basis  of  which  the  net  inconte 
is  computed  under  Section  212;  i.e.,  if  items  not  actually  paid  or 
received  are  nevertheless  treated  as  accomplished  facts  and  the 
books  of  taxpayers  regularly  so  kept  and  this  method  will  clearly 
reflect  the  taxable  net  income,  it  may  be  used  for  income  and 
excess  profits  tax;  otherwise  the  basis  of  actual  receipt  and  pay- 
ment, or  such  method  as  the  Commissioner  may  require,  must*be 
used.  Subject  only  to  the  requirement  that  the  method  used  must 
clearly  reflect  the  net  taxable  income  (a  result  which  would  be 
practically  and  relatively  the  same  by  whatever  method  calcu- 
lated, if  employed  over  a  number  of  years),  taxpayer  may  select 
his  own  method  of  bookkeeping. 

Hence  the  term  paid,  for  the  purpose  of  deductions  and  credits 
for  income  tax,  means — "paid  or  accrued"  or  "paid  or  incurred," 
according  to  the  method  of  accounting  upon  the  basis  of  which 
the  net  income  is  computed  under  Section  212. 

Person:  Includes  individuals,  partnerships  and  corporations. 

Personal  Service  Corporation:  A  corporation  whose  income  is 
ascribed  primarily  to  the  activities  of  the  principal  owners  or  stock- 
holders who  are  themselves  regularly  engaged  in  the  active  con- 
duct of  the  affairs  of  the  corporation  and  in  which  capital  (whether 
invested  or  borrowed)  is  not  a  material  income  producing  factor; 
but  does  not  include  any  foreign  corporation,  50  per  cent,  or  more 
of  whose  gross  income  consists  of  either 

(1)  Gains,  profits,  or  income  derived  from  trading  as  a  prin- 
cipal, or 

(2)  Of  gains,  profits,  commissions,  or  other  income  derived 
from  a  government  contract  or  contracts  made  between 
April  6,  1917,  and  November  11,  1918,  both  dates  inclusive. 

Possession  of  the  United  States 

For  the  purpose  of  the  Income  Tax  refers  to 
Porto  Rico 
Philippine  Islands 
Guam 

Tutuila,  Samoa 
Virgin  Islands 
Present  War:  Means  the  war  between  the  United  States  and  the 

German  Government. 
Profit:  Occupation,  customary  pursuit. 

Reserve  Fund  Required  by  Law:  In  the  case  of  an  assessment  insur- 
ance company,  sums  actually  deposited  with  State  or  territorial 
offices  pursuant  to  law  as  guaranty  or  reserve  funds. 
Secretary:  Means  Secretary  of  the  Treasury. 

Stock  Dividend:  A  dividend  paid  in  stock  of  a  corporation  (capital- 
ization of  surplus).  It  shall  be  considered  income  to  the  amount 
of  earnings  or  profits  distributed  by  means  of  such  dividend. 


Definitions  15 


If  any  stock  dividend — 

(1)  Is  received  by  the  taxpayer  between  January  1  and  No- 
vember 1,  1918,  both  dates  inclusive,  or 

(2)  Is  during  such  period  bona  fide  authorized  and  declared 
and  entered  on  the  books  of  the  corporation,  and  is 
received  by  a  taxpayer  after  November  1,  1918,  and  before 
the  expiration  of  30  days  after  the  passage  of  the  Act  of 
1918  (passed  the  Senate  February  13,  1919,  and  supposed 
to  be  signed  by  the  President  on  his  return  from  Europe). 

Then  such  dividend  shall,  in  the  manner  provided  in 
Section  206  of  the  statute,  be  taxed  to  the  recipient  at  the 
rates  prescribed  by  law  for  the  years  in  which  the  cor- 
poration accumulated  the  earnings  or  profits  from  which 
dividend  was  paid,  but  the  dividend  shall  be  deemed  to 
have  been  paid  from  the  most  recently  accumulated  earn- 
ings or  profits. 

That  is  to  say — 

(a)  At  the  rate  for  1918,  to  the  extent  of  the  1918 
accumulations  of  the  corporation  making  the 
dividend; 

(b)  Next,  at  the  1917  rates  to  the  extent  of  1917  ac- 
cumulations of  the  corporation  making  the  divi- 
dend ; 

(c)  Next,  at  the  1916  rates  to  the  extent  of  the  1916 
accumulations  of  the  corporation  making  the 
dividend ; 

(d)  Next,  at  the  rate  or  rates  prevailing  from  Febru- 
ary 28,  1913,  to  December  31,  1915,  to  the  extent 
(if  so  much  shall  be  included  in  the  dividend) 
of  accumulations  within  such  period  by  the  cor- 
poration making  the  dividend. 

Thereafter  any  distribution  of  corporate  earnings  or  profits 
accumulated  prior  to  February  28,  1913,  shall  not  be  subject  to 
tax  and  is  not  to  be  included  in  the  return  of  income. 

A  stock  dividend  received  after  "30  days  after  the  passage" 
of  the  Rev.  Act  of  1918  would  appear  to  be  taxable,  if  at  all,  as 
other  dividends  are  taxed. 

Taxable  Year:  The  calendar  year,  or  the  fiscal  year  ending  during 
such  calendar  year,  upon  the  basis  of  which  the  net  income  is 
computed  for  the  purposes  of  the  tax  to  individuals  and  corpora- 
tions and  insurance  companies. 

Taxable  Year  1918:  The  calendar  year  1918  or  any  fiscal  year  ending 
during  the  calendar  year  1918. 

Taxpayer:  Includes  any  individual,  corporation,  trust  or  estate  whose 
income  is  subject  to  tax  imposed  by  the  Revenue  Act  of  1918. 

Trade:  Business  carried  on  for  the  procuring  of  subsistence. 

In  the  employment  of  trade,  contracted  to  "in  trade,"  means  the 
continued  and  continuous  occupation  with,  and  employment  of, 


16  Definitions 


one's  time,  attention  and  energy  in  the  business  which  is  carried 

on  for  subsistence  or  profit. 
United  States:  When  used  in  a  geographical  sense  includes  only  the 

states,  the  territories  of  Alaska  and  Hawaii  and  the  District  of 

Columbia. 
Withholding  Agent:  Any  person  required  to  deduct  and  withhold 

any  tax  from  income  paid  by  such  person  to  another. 


PARTI 
INCOME  TAX 

The  Revenue  Act  of  1918  levies  a  tax  on  income —  1 

(1)  At  one  set  of  rates  for  1918;  2 

(2)  At  lower  rates  for  1919  and  subsequent  years.  3 
Income  is  the  thing  taxed,  that  is,  a  portion  of  income  only  is  to  be 

taken  for  the  tax.  The  tax  is  never  to  exceed  the  amount  of  the 
income. 

The  subjects  of  taxation,  or  taxpayers:  4 

Are  individuals  (including  Partnership  and  Personal  Service  Cor- 
poration income,  as  individual  income)  ;  Estates  or  Trusts ;  and 
Corporcttions.  These  taxable  entities  may  be  citizens  or  aliens 
resident  in  the  United  States,  or  may  be  non-resident  aliens  with 
income  from  sources  within  the  United  States,  and  corporations, 
associations  or  joint  stock  companies,  whether  domestic  or  foreign. 

EXEMPT  INCOME 

Not  all  income  is  taxed.     Aside  from  certain  specified  exemptions  5 
and  credits,  the  following  items,  representing  income,  are  not  taxed 
and  are  not  to  be  included  (except  as  otherwise  specially  provided 
for)  in  returns  of  income: 

(1)  The  Proceeds  of  Life  Insurance  Policies  paid  upon  the  death  6 
of  the  insured  to  individual  beneficiaries  or  to  the  estate  of 
the  insured; 

(2)  The  Amount  Received  by  the  Insured  as  a  Return  of  Pre-  7 
•  mlum  or  Premiums  paid  by  him  under  life  ilisurance,  en- 
dowment or  annuity  contracts,  whether  during  the  term  or 
at  the  maturity  of  the  term  mentioned  in  the  contract  or 
upon  surrender  of  the  contract; 

(3)  The  Value  of  Property  acquired  by  gift,  bequest,  devise  or  8 
descent  (but  the  income  from  such  property  shall  be  included 
in  gross  income) ; 

(4)  Interest  upon  ® 

(a)  All  obligations  of  a  state,  territory,  or  any  political  10 
subdivision  thereof,  or  the  District  of  Columbia; 

(b)  Securities  issued  under  the  provisions  of  the  Federal  11 
Farm  Loan  Act  of  July  17,  1916 ; 

(c)  Obligations  of  the  United  States  or  its  possessions;   12 

(d)  Bonds  issued  by  the  War  Finance  Corporation.  13 
Provided,  that  every  person  owning  any  of  the  obliga-  14 

17 


18  Income  Tax 


tions,  securities  or  bonds  enumerated  in  clauses  (a), 
(b),  (c),  (d)  of  item  4  shall,  in  the  return  required 
by  this  title,  submit  a  statement  showing  the  number 
and  amount  of  such  obligations,  securities  and  bonds 
owned  by  him  and  the  income  received  therefrom,  in 
such  form  and  with  such  information  as  the  Com- 
missioner may  require.* 

15  In  the  case  of  obligations  of  the  United  States  isifued 

after  September  1,  1917,  and  in  the  case  of  bonds 
issued  by  the  War  Finance  Corporation,  the  interest 
shall  be  exempt  only  if  and  to  the  extent  provided  in 
the  respective  acts  authorizing  the  issue  thereof  as 
amended  and  supplemented,  and  shall  be  excluded 
from  gross  income  only  if  and  to  the  extent  it  is 
wholly  exempt  from  taxation  to  the  taxpayer  both 
for  Income  and  War  Excess  Profits  Tax. 

li  (5)  The  Income  of  Foreign  Governments  received  from  invest- 

ments in  the  United  States  in  stocks,  bonds  or  other  domes- 
tic securities,  owned  by  such  foreign  governments,  or  from 
interest  on  deposits  in  banks  in  the  United  States  of  moneys 
belonging  to  such  foreign  governments,  or  from  any  other 
sources  within  the  United  States ; 

17  (6)  Amounts  Received,  Through  Accident  or  Life  Insurance  or 

Through  Workmen's  Compensation  Acts  as  compensation 
for  personal  injuries  or  sickness,  plus  the  amount  of  any 
damages  received,  whether  by  suit  or  agreement  on  account 
of  such  injuries  or  sickness. 

18  (7)  Income  Derived  From  Any  Public  Utility  or  the  exercise  of 

any  essential  governmental  function,  when  such  income 
accrues : 

it  (a)  To  any  state,  territory  or  the  District  of  Columbia,  or 

any  political  subdivision  of  a  state  or  territory,  or 

to  (b)  To  the  government  of  any  possession  of  the  United 

States,  or  any  political  subdivision  thereof — 
Whenever  prior  to  September  8,  1916,  any  state,  ter- 
ritory or  the  District  of  Columbia,  or  any  political 
subdivision  of  a  state  or  territory,  entered  in  good 
faith  into  a  contract  with  any  person,  the  object  and 
purpose  of  which  was  to  acquire,  construct,  operate, 
or  maintain  a  Public  Utility,  no  Income  Tax  is  to  be 
levied  on  the  income  derived  from  the  operation  of 

•NOTE:  This  means  that  tax-free  income  must  be  used  for  the  purpose 
of  reducing  the  amount  of  a  net  loss  as  provided  in  Section  204  of  the 
statute.  The  statement  of  this  tax-free  income  on  the  return  will  give  the 
Government  both  information  and  a  check  on  claims  for  net  loss. 


Income  Tax  19 


such  Public  Utility,  so  far  as  the  payment  of  such 
tax  will  impose  a  loss  or  burden  upon  such  state, 
territory,  District  of  Columbia,  or  political  subdivi- 
sion. This  provision  does  not  confer  upon  such 
person  any  financial  gain  or  exemption,  or  relieve 
such  person  from  payment  of  Income  Tax  upon  the 
part  or  portion  of  such  income  to  which  such  person 
is  entitled  under  such  contract. 

(8)  So  much  of  the  Amount  Received  During  the  Present  War  21 
by  a  Person  In  the  Military  or  Naval  Forces  of  the  United 
States  as  salary  or  compensation   in   any  form  from  the 
United  States  for  active  services  in  such  forces  as  does  not 
exceed  $3,500. 

INCOME  OF  NONRESIDENT  ALIENS 

In  the  case  of  non-residei^t  alien  individuals,  gross  income  in-  22 
eludes  only  the  gross  income  from  sources  within  the  United  States, 
including  the  interest  on  bonds,  notes,  or  other  interest-bearing  obli- 
gations of  residents,  corporate  or  otherwise,  dividends  from  resident 
corporations,  and  including  all  amounts  received  (although  paid 
under  a  contract  for  the  sale  of  goods  or  otherwise)  representing 
profits  on  the  manufacture  and  disposition  of  goods  within  the  United 
States. 

INCOME 

The  law  provides  that  the  tax —  23 

"shall  be  levied,  collected  and  paid  for  each  taxable  year  upon  the 

net  income" 

of  every  taxpayer. 

The  law  designates  classes  of  income  subject  to  tax,  as  gains, 
profits,  and  income   (compensation). 

Gain:  24 

An  increase  of  any  form  of  profit.  Specifically,  commercial  profit 
or  emolument;  as  the  gain  of  business;  amount  of  increase  or 
addition. 

Profit:  25 

The  advance  in  the  price  of  goods  sold  beyond  the  cost  of  pur- 
chase; the  excess  of  receipts  over  expenditures,  that  is  net  earn- 
ings; the  receipts  of  a  business  after  deducting  current  expenses; 
it  is  equivalent  to  net  receipts.  In  commerce,  it  means  the  advance 
in  the  price  of  goods  sold  beyond  the  cost  of  purchase.  The  con-  26 
sideration,  in  money,  given  for  the  purchase  of  a  thing.  It  is 
synonymous  with  value. 

We  have,  therefore,  as  the  definition  of  income:     The  amount  of  27 
money   (excluding  exemptions)    coming  to  a  person  or  corporation 
within  a  specified  time  as  opposed  to  the  totality  of  goods  and  wealth 
in  existence,  and  in  possession  of  such  person  or  corporation,  at  the 
beginning  of  such  period. 


20  Income  Tax 


28  Income 

Is  the  flow  of  capital's  service;  what  one's  capital  does  for  him; 
and  is  not  necessarily  synonymous  with  receipt.  Receipt  basis  is 
the  general  rule  for  Income  Tax  purposes,  however.  Except  where 
the  books  of  account  are  consistently  kept  in  a  manner  so  as  to 
make  a  different  showing  and  a  showing  which  will  adequately 
and  correctly  reflect  income,  receipt  basis  is  to  be  used,  particu- 
larly for  the  purpose  of  ascertaining  basic  value  measure  in 
determining  gain  or  profit.  For  the  purpose  of  ascertaining  gain 
or  profit,  there  must  be  a  realization  of  value  through  some  form 
of  receipt  or  completed  and  closed  transaction,  in  which  gain  or 
profit  will  be  measured. 

29  Basic  Value  is  a  question  of  fact  and  neither  the  Government  nor 
the  taxpayer  is  bound  by  book  entries  where  the  entries  on  the 

books  do  not  correctly  state  the  facts. 

• 

30  One's  service  may  be  his  capital,  but  in  such  event  there  is  no 
subtraction  of  capital  from  receipt  for  the  purpose  of  ascertaining 
"gain  or  profit."  In  such  case,  the  entire  receipt  has  the  charac- 
teristic of  compensation  or  price  of  service,  and  is  therefore  to  be 
included,  gross,  in  the  return  of  income. 

31  Disservice  is  a  negative  service.  A  flow  of  disservice  or  nega- 
tive income  is  called  outgo.  The  difference  between  service  and 
disservice  is,  therefore,  to  be  designated  net  income,  but  net  income 
for  the  purpose  of  the  Income  Tax  is  not  necessarily  the  true  net 
income  either  of  an  individual  or  an  enterprise. 

82  Gross  Income: 

Gross  income,  for  the  purpose  of  and  within  the  meaning  of 
the  Income  Tax  Law,  includes:  gains,  profits,  and  income 
derived  from — 

ZZ  M  Salaries,  wages  or  compensation  for  personal  service 

of  whatever  kind  and  in  whatever  form  paid,  or  from 
professions  or  vocations; 

S4  (b)   From  trades,  businesses,  commerce,  trades  or  dealings 

in  property   (whether  real   or  personal)    growing  out 
of  the  ownership  or  use  of  or  interest  in  such  property. 

35  (c)  Also  from  interest,  rent,  dividends,  securities; 

36  (d)  Also  from  the  transaction  of  any  business  carried  on 

for  gain  or  profit; 

37  (e)  Or  gains  or  profits  and  income  derived  from  any  source 

whatever. 

38  Whenever  a  return  of  income  is  made,  all  or  any  of  the  foregoing 
received  in  an  accounting  period  shall  be  included  in  the  return  of 
income  for  the  taxable  year  in  which  received,  excent  that  stock 


Income  Tax  21 


dividends  received  in  1918  are  to  be  taxed  according  to  the  special 
provision  of  paragraph  (d)  of  section  201  (see  page  14).*^' 

Net  Income:  39 

We  begin  v^^ith  the  proposition  that  there  must  be  income  or 
there  can  be  no  tax.  When  the  net  income  of  an  individual 
equals  or  exceeds  $1,000  for  a  single  individual  or  if  married 
and  not  living  w^ith  husband  or  wife;  or  $2,000  for  a  married 
individual  (living  w^ith  consort)  ;  in  the  case  of  an  estate 
or  trust,  if  any  single  beneficiary  has  an  interest  in  the  net 
income  of  the  trust  of  $1,000  or  $2,000  for  a  married  bene- 
ficiary living  with  consort  if  there  be  no  beneficiary  in  the 
$1,000  class;  and  regardless  of  the  amount  of  income  if  the 
taxpayer  is  a  corporation — all  income  which  is  of  a  taxable 
class  must  be  included  in  the  statement  or  return  of  income. 

In  this  same  return  are  also  to  be  included  the  several  deductions  40 
allowed  by  law. 

The  difference  between  the  two  sides  (receipts  and  deductions)  is  4I 
the  net  income  which  is  to  be  taxed. 

Returns :  42 

A  return  of  income  is  a  statement  of  income,  deductions  and 
credits,  in  the  form  prescribed  by  the  Commissioner  of  Internal 
Revenue. 

The  subjects  of  taxation,  or  taxpayers,  who  are  required  to  make  43 
and  file  returns  of  income  are: 
Individuals : 

(1)  Citizens; 

(2)  Aliens  resident  in  the  United  States; 

(3)  Non-resident  aliens,   for  income  received  by  them  from 
sources  within  the  United  States. 

Estates  or  Trusts :  44 

Return  to  be  made  by  the  Fiduciary. 

Corporations  45 

If  a  husband  and  wife  living  together  have,  each,  an  aggregate  46 
income  of  $2,000  or  over,  each  shall  make  a  return  unless  the  income 
of  each  is  included  in  a  single  joint  return.  The  reference  to  sepa- 
rate income  of  husband  and  wife  indicates  that  for  the  purpose  of 
separate  return,  the  income  must  be  from  separate  estates.  Income 
produced  by  or  owned  by  one  of  the  parties  only  but  in  which  both 
share,  is  properly  included  in  a  single  joint  return. 

The  return  of  income  in  the  case  of  individuals  and  estates  or  47 
trusts,   is  to  be  made,   or  not  made,   according  to.  whether  or  not 
the  net  income  equals  or  exceeds  or  falls  below  the  amount  specified 


♦Allocation  of  dividends. 


22  Income  Tax 


by  the  statute  as  requiring  a  return  of  income.  The  taxpayer  is 
himself  to  decide  whether  or  not  he  has  a  net  income  sufficient  to 
require  a  return  of  income.  If  a  return  is  to  be  made,  then,  of 
course,  all  income  of  a  taxable  class  is  to  be  entered  in  the  return 
according  to  the  form  provided  for  that  purpose. 

48  Citizens  of  a  possession  of  the  United  States,  but  who  are  not 
residents  of  the  United  States  (see  page  58),  are  subject  to  taxa- 
tion on  only  income  from  sources  in  the  United  States  in  the  same 
manner  and  under  the  same  conditions  as  provided  for  nonresident 
aliens. 

49  Citizens  of  the  United  States,  regardless  of  where  they  reside 
and  aliens  resident  in  the  United  States,  are  subject  to  tax  on  their 
entire  taxable  income  from  all  sources,  domestic  or  foreign. 

50  Nonresident  aliens  (and  citizens  of  a  possession  of  the  United 
States  and  not  resident  in  the  United  States,  as  explained  above) 
must  include  in  returns  of  income  filed  by  or  for  them  the  gross 
income  received  by  them  from  sources  within  the  United  States, 
including  interest  on  bonds,  notes  or  other  interest  bearing  obliga- 
tions of  residents,  corporate  or  otherwise;  dividends  from  resident 
corporations,  including  all  amounts  received  (although  paid  under 
a  contract  for  the  sale  of  goods  or  otherwise)  representing  profits 
on  the  manufacture  and  distribution  of  goods  within  the  United 
States. 

51  If  an  individual  is  unable  to  make  his  own  return,  a  return  shall 
be  made  by  a  duly  authorized  agent  or  by  the  guardian  or  other 
person  charged  with  the  care  of  the  person  or  property  of  such  tax- 
payer. Necessarily,  the  person  making  the  return  must  have  suffi- 
cient knowledge  of  the  affairs  and  income  of  such  taxpayer  to  enable 
him  to  make  the  return,  and  while  the  statute  makes  it  the  duty  of 
the  custodian  of  the  person  or  property  to  make  return  for  income 
in  his  custody,  in  cases  where  such  custodian  of  the  "person"  and 
"property"  is  not  the  same  person,  one  or  both  will  be  required  to 
act,  whichever  will  secure  the  desired  result. 

52  Returns  of  income  of  individuals  shall  include — 

(a)   All  their  own  personal  income: 

53  (b)  Each  partner's  share  of  partnership  profits,  whether  divided 

or  distributed  or  not; 

54  (c)   His  aliquot  part  of  the  net  income  of  any  personal  service 

corporation,  the  same  as  for  a  partnership; 

55  (d)   His  aliquot  part  of  the  net  accumulation  or  undivided  profits 

of  a  corporation  which  the  Commissioner  of  Internal  Rev- 
enue shall  certify  was  either  formed  or  is  availed  of  for  the 
purpose  of  preventing  the  imposition  of  the  surtax  upon 
income  of  its  stockholders  or  members,  through  the  medium 


Income  Tax 


of  permitting  its  gains  or  profits  to  accumulate  instead  of 
being  divided  or  distributed. 

In  such  cases,  neither  the  partnership  nor  the  corporation  56 
specified  shall  be  subject  to  tax  on  its  income  or  undivided 
profits,  but  the  income  shall  be  included  and  the  tax  paid  by 
the  individual  owner  or  owners  in  all  respects  as  for  the  in- 
come of  a  partnership,  for  both  the  Normal  and  Surtax. 

Returns  of  Income  are  to  be  Filed —  5? 

(a)  On  or  before  the  15th  day  of  the  third  month  following  the 
close  of  the  fiscal  year; 

(b)  If  a  return  is  made  on  the  basis  of  the  calendar  year,  it  shall   58 
be  filed  on  or  before  the  15th  day  of  March  next  following 
the  close  of  the  calendar  year  for  the  income  for  which  return 

is  to  be  made, 

(c)  The  Commissioner  of  Internal  Revenue  may  grant  a  reason-   59 
able  extension  of  time  for  filing  returns  of  income  whenever 

in  his  judgment  good  cause  exists  and  he  shall  keep  a  record 
of  every  such  extension  and  of  the  reason  therefor.  Except 
in  the  case  of  taxpayers  who  are  abroad,  no  such  extension 
shall  be  for  more  than  six  months. 

When  and  Where  Returns  Are  to  Be  Made:  60 

Individuals  (Form  1040-A  for  $5,000  and  under,  Form  1040  for 
over  $5,000).  Returns  of  income  shall  be  made  to  the  Collector  for 
the  dsitrict  in  which  is  located  the  residence  or  principal  place  of 
business  of  the  person  making  the  return,  and  if  he  has  no  legal 
residence  or  place  of  business  within  the  United  States,  then  to 
the  Collector  of  Internal  Revenue  at  Baltimore,  Maryland. 

In  Case  of  a  corporation:  Returns  shall  be  made  to  the  Collector  of  61 
the  District  in  which  is  located  the  principal  place  of  business  or 
principal  office  or  agency  of  the  Corporation,  or,  if  it  has  no  prin- 
cipal place  of  business  or  principal  office  or  agency  in  the  United 
States,  then  to  the  Collector  at  Baltimore,  Maryland. 

Several  forms  are  provided,  according  to  the  nature  of  corpo- 
ration— The  general  corporation  form  is  Form  1031. 

Returns  When  Accounting  Period  Changed:  62 

For  the  first  time  in  any  of  the  Income  Tax  Laws  of  the  United 
States,  an  individual  is  permitted  to  have  a  fiscal  year  and  make 
returns  of  income  as  for  a  period  other  than  the  calendar  year. 
The  following,  however,  applies  equally  to  corporations: 

If  a  taxpayer,  with  the  approval  of  the  Commissioner  of  In-  63 
ternal  Revenue,  changes  the  basis  of  computing  net  income  from 
fiscal  year  to  calendar  year,  a  separate  return  shall  be  made  for 
the  period  between  the  close  of  the  last  fiscal  year  for  which 
return  was  made  and  the  following  December  31. 


24  Income  Tax 


64  For  example: 

Change  from  fiscal  year  ending  March  31  to  calendar  year,  and 
say,  the  last  fiscal  year  ended  March  31,  1917 — 

A  separate  return  will   be  required  for  the  period  April   1, 
1917,  to  December  31,  1917. 

65  If  the  change  is  from  calendar  year  to  fiscal  year,  a  separate  re- 
turn shall  be  made  for  the  period  between  the  close  of  the  last 
calendar  year  for  which  return  was  made  and  the  date  designated 
as  the  close  of  the  fiscal  year: 

66  For  example: 

If  the  last  calendar  year  for  which  return  is  made  be  1917  and 
the  designated  close  of  fiscal  year  be  March  31 — 

A   separate  return  will  be  required  for  the  period  between 
December  31,  1917,  and  March  31,  1918. 

67  If  the  change  is  from  one  fiscal  year  to  another  fiscal  year,  a 
separate  return  shall  be  made  for  the  period  between  the  close  of 
the  former  fiscal  year  and  the  date  designated  as  the  close  of  the 
new  fiscal  year. 

68  For  example: 

Change  from  a  fiscal  year  ending  March  31  to  a  fiscal  year  end- 
ing June  30,  and,  say,  March  31,  1918,  was  the  close  of  the  last 
fiscal  year — 

A  separate  return  will  be  required  for  the  period  between 
March  31,  1918,  and  June  30,  1918. 

69  If  a  taxpayer  making  his  first  return  for  Income  Tax  keeps  his 
.  books  on  the  basis  of  a  fiscal  year,  he  shall  make  a  separate  return 

for  the  period  between  the  beginning  of  the  calendar  year  in  which 
the  fiscal  year  ends  and  the  end  of  such  fiscal  year. 

70  For  example: 

Business  begun,  say,  April  1,  1918,  and  books  of  annual  account- 
ing kept  as  for  April  1  to  March  31 — 

A  separate  return  would  be  required  for  the  period  between 
January  1  and  March  31,  1919. 

71  This  means  that  this  man  will  be  required  to  make  two  returns 
for  the  first  twelve  months  of  his  business: 

(a)  For  the  period  April  1  to  December  31,  1918. 

(b)  For  the  period  January  1  to  March  31,  1919.* 

72  In  all  of  the  above  cases,  net  income  shall  be  computed  on  the 
basis  of  the  time  covered  by  the  return  and  *the  tax  shall  be  com- 
puted on  the  net  income  shown  by  each  return  at  the  rate  or  rate", 

♦Such  a  proceeding  is  competent  if  Congress  desires  it,  but  where  returns 
are  required  to  cover  a  period  of  twelve  months,  represented  either  by  a 
calendar  year  or  fiscal  year  (when  the  business  or  enterprise  covers  that 
much  time,  and  the  example  does),  reasonableness  would  appear  to  be  lack- 
ing in  such  a  requirement. 


Income  Tax  25 


ior  the  calendar  year  in  which  the  period  of  payment  covered 
by  the  return  is  included;  and  the  credits  of  personal  exemption 
and  allowance  for  dependents  shall  be  reduced  respectively  to  the 
amounts  which  bear  the  same  ratio  to  the  full  credits  provided  by 
law  as  the  number  of  months  covered  by  the  return  bears  to  twelve 
months. 

Partnerships  and  Personal  Service  Corporations:  73 

When  the  taxable  year  of  a  partner  and  that  of  a  partnership  or 
personal  service  corporation  coincide,  the  share  of  a  partner  in 
the  partnership  income  shall  be  included  in  and  become  a  part  of 
his  return  of  income  for  his  taxable  year.  If  a  partner's  net  in- 
come for  such  taxable  year  is  computed  upon  the  basis  of  a  period 
different  from  that  upon  the  basis  of  which  the  net  income  of  the 
partnership  is  computed,  then  the  partner  shall  include  in  his 
.return  his  distributive  share  of  the  net  income  of  the  partnership 
for  any  accounting  period  of  the  partnership  ending  within  the 
fiscal  or  calendar  year  upon  the  basis  of  which  the  partner's  net 
income  is  computed. 

The  partner  shall,  for  the  purposes  of  the  Normal  Tax,  be  allowed  74 
as  credits  (in  addition  to  the  credits  allowed  to  him  for  personal 
exemption,  dependents,  dividends  and  interest  on  Liberty  Bonds  or 
bonds  of  the  War  Finance  Corporation),  his  proportionate  share  of 
the  dividends  and  interest  on  Liberty  Bonds  and  bonds  of  the  War 
Finance  Corporation  as  are  received  by  the  partnership  or  personal 
service  corporation. 
Note: 

It  would  seem,  however,  that  in  a  case  where  Liberty  Bond  in-  75 
terest  received  by  a  partnership  is  subjected  to  the  Excess  Profits 
Tax  levied  by  the  Act  of  October  3,  1917 — not  the  amount  "received" 
by  the  partnership  but  the  net  only,  or  remainder  of  such  Liberty 
Bond  interest  after  deduction  of  Excess  Profits  Tax  thereon,  should 
be  used  by  the  partner  as  a  credit  for  the  purpose  of  the  Normal 
Income  Tax.  Otherwise,  inasmuch  as  the  distributive  share  of  the 
partner  is  determined  by  the  difference  between  partnership  net 
income  and  the  Excess  Profits  Tax,  a  partner  would  receive  in  his 
personal  return  the  benefit,  as  a  deduction,  of  the  amount  of  his 
share  of  partnership  or  Personal  Service  Corporation  Excess  Profits 
Tax,  notwithstanding  the  fact  that  he  had  received  the  benefit  of  this 
deduction  on  the  partnership  or  personal  service  corporation  return. 

There  is  this  very  interesting  feature  in  connection  with  the  76 
taxation  of  income  from  Personal  Service  Corporations.  The  entire 
amount  of  such  net  income  is  to  be  included  in  the  returns  of  the 
stockholders,  but  the  amount  of  such  income  which  shall  be  dis- 
tributed as  dividends  will  be  subject  to  surtax  only  when  paid  from 
profits  of  the  corporation,  accumulated  between  February  28,  1913, 
and  December  31,  1917,  whereas  any  undivided  profit  of  the  taxable 
year  remaining  with  the  corporation  will  be  subject  to  both  the 


26  Income  Tax 


Normal  Tax  and  Surtax  in  the  returns  of  its  stockholders,  in  all 
cases  whenever  those  taxes  apply.  Another  interesting  ^''»ature  is 
that  dividends  by  Personal  Service  Corporations  will  be  deemed  to 
have  been  made  from  profits  of  the  corporation  accumulated  since 
December  31,  1917,  so  long  as  any  such  profits  remain  undistributed 
and,  therefore,  only  after  everything  accumulated  since  December 
31,  1917,  shall  have  been  distributed,  may  there  be  a  dividend  by 
Personal  Service  Corporations  which  will  be  subject  to  the  Surtax 
only  to  the  stockholder.  This  will  involve  a  segregation,  by  such 
corporations,  of  their  profits  with  December  31,  1917,  as  the  dividing 
line  and  necessitate  bookkeeping  accounts  which  will  show  the 
state  of  these  funds  at  all  times. 

77  The  provisions  for  tax  on  income  for  a  taxable  year,  composed 
of  parts  of  different  calendar  years  for  which  different  rates  of  tax 
apply,  are  to  be  found  in: 

78  Section  205 — Fiscal  year  with  different  rates: 

79  Section  206 — Parts  of  income  subject  to  rates  for  different  years. 

(Both  'of  these  relate  to  taxation  of  individual  income  and 
may  refer  to  tax  on  corporate  income.) 

80  Section  218  (c  and  d) — Partnerships  and  Personal  Corporations. 

g|  Section  335 — Excess  or  War  Profits  Tax  on  income  of  corpora- 
tions and  partnerships  at  different  rates  for  different  calendar  years. 

Section  205: 

g2  (A)  That  if  a  taxpayer  makes  return  for  a  fiscal  year,  beginnin£- 
in  1917  and  ending  in  1918,  his  income  tax  for  the  taxable  year  1918 
shall  be  the  sum  of: 

33  (1)  The  same  proportion  of  an  income  tax  for  the  entire  period 

(computed  on  net  income  as  determined  under  and  at  the 
rates  provided  by  the  Revenue  Act  of  1916  as  amended  by 
act  of  1917  and  by  the  Revenue  Act  of  1917)  which  the  por- 
tion of  such  period  falling  within  the  calendar  year  1917 
is  of  the  entire  period,  and 

84  (2)  The  same  proportion  of  an  income  tax  for  the  entire  period 

(computed  on  net  income  as  determined  under  and  at  the 
rates  provided  by  the  Revenue  Act  of  1918)  which  the  por- 
tion of  such  period  falling  within  the  calendar  year  1918  is 
of  the  entire  period :  Provided,  that  in  the  case  of  a  personal 
service  corporation  the  amount  to  be  paid  shall  be  only  that 
specified  in  Clause  (1). 

g5  Any  amount  heretofore  or  hereafter  paid  on  account  of  the  in- 
come tax  for  1917  part  of  such  fiscal  year,  shall  be  credited  .towards 
the  income  tax  for  such  fiscal  year  imposed  by  the  Revenue  Act  of 
1918,  and  if  the  amount  so  paid  exceeds  the  amount  of  such  tax 


Income  Tax  27 


imposed  by  the  Revenue  Act  of  1918,  or,  in  the  case  of  a  Personal 
Service  Corporation,  the  amount  specified  in  Clause  (1),  the  excess 
shall  be  credited  or  refunded  in  accordance  with  the  provisions  of 
Section  252. 

(B),  If  a  taxpayer  makes  a  return  for  a  taxable  year  beginning  in   86 
1918  and  ending  in  1919,  the  income  tax  for  such  fiscal  year  shall  be 
the  sum  of: 

(1)  The  same  proportion  of  the  income  tax  for  the  entire  period   87 
(computed  on  the  net  income  as  determined  under  and  at 
the  rates   specified   by  the   Revenue  Act   of   1918,  for  the 
calendar  year  1918)  which  the  portion  of  such  period  falling 
within  the  calendar  year  1918  is  of  the  entire  period. 

(2)  The  same  proportion  of  an  Income  Tax  for  the  entire  period   88 
((^omputed  on  net  income  as  determined  under  and  at  the 
rates  specified  by  the  Revenue  Act  of  1918  for  the  calendar 
year   of   1919)    which   the   portion   of   such   period   falling 
within  the  calendar  year  1919  is  of  the  entire  period. 

(C)   If  a  fiscal  year  of  a  partnership  begins  in  1917  and  ends  in   89 
1918  or  begins  in  1918  and  ends  in  1919,  then  notwithstanding  the 
provisions  of  subdivision  (B)  of  section  218:* 

(1)  The  rates  for  the  calendar  year  during  which  such  fiscal   90 
year  begins  shall  apply  to  an  amount  of  each  partner's  share 

of  such  partnership  net  income  (determined  under  the  law 
applicable  to  such  year)  equal  to  the  proportion  which  the 
part  of  such  fiscal  year  falling  within  such  calendar  year 
bears  to  the  full  fiscal  year,  and 

(2)  The  rates  for  the  calendar  year  during  which  such  fiscal   91 
year  ends  shall  apply  to  an  amount  of  each  partner's  share 

of  such  partnership  net  income  (determined  under  the  law 
applicable  to  such  calendar  year)  equal  to  the  proportion 
which  the  part  of  such  fiscal  year  falling  within  such  calen- 
dar year  bears  to  the  full  fiscal  year: 

Provided,  that  in  the  case  of  a  Personal  Service  Corpora- 
tion with  respect  to  a  fiscal  year  beginning  in  1917  and 
ending  in  1918,  the  amount  specified  in  Clause  (1)  shall  not 
be  subject  to  normal  tax. 

Section  218: 

(c)   In  the  case  of  an  individual  member  of  a  partnership  which   92 
makes  return  for  a  fiscal  year  beginning  in  1917  and  ending 
in  1918,  his  proportionate  share  of  any  Excess  Profits  Tax 
imposed  upon  the  partnership  under  Revenue  Act  of  1917  with 


*The  difference  between  •  paragraph  (c)  of  Section  205  and  Section  218  (b)  is 
that  205  ^c)  prorates  for  the  second  year  as  well  as  the  first,  while  218  (b)  takes 
the  "rcwiainder"  or  difference  between  proration  for  the  first  of  the  two  calendar 
years  and  the  entire  net  income.     The  result  is  the  same. 


28  Income  Tax 


respect  to  that  part  of  such  fiscal  year  falling  in  1917,  shall, 
for  the  purpose  of  determining  the  tax  imposed  by  this  title 
(Income  Tax),  be  credited  against  that  portion  of  the  net 
income  embraced  in  his  personal  return  for  the  taxable  year 
1918  to  which  the  rates, for  1917  apply. 

93  (d)  The  net  income  of  the  partnership  shall  be  computed  in  the 

same  manner  and  on  the  same  basis  as  provided  for  indi- 
viduals, except  that  the  deduction  for  contributions,  permitted 
to  individuals,  shall  not  be  allofwed. 

94  Section  206 

That  whenever  parts  of  a  taxpayer's  income  are  subject  to  rates 
for  different  calendar  years,  the  part  subject  to  the  rates  for  the 
most  recent  calendar  year  shall  be  placed  in  the  lower*  brackets 
of  the  rate  schedule  provided  in  this  title,  the  part  subject  to  the 
rates  for  the  next  preceding  calendar  year  shall  be  placed  in  the 
next  higher  brackets  of  the  rate  schedule  applicable  to  that  year, 
and  so  on  until  the  entire  net  income  has  been  accounted  for.  In 
determining  the  income,  any  deductions,  exemptions  or  credits  of 
a  kind  not  plainly  and  properly  chargeable  against  the  income 
taxable  at  rates  for  a  preceding  year  shall  first  be  applied  against 
the  income  subject  to  rates  for  the  most  recent  calendar  year;  but 
any  balance  thereof  shall  be  applied  against  the  income  subject 
to  the  rates  of  the  next  preceding  year  or  years  until  fully  allowed. 

The  Names  or  Titles  of  the  Several  Taxes: 

95  (1)   The  Normal  Income  Tax — 

This  is  a  tax  on  the  net  income  of  individuals  which  is  in 
excess  of  the  sums  of — 

9f  (a)    (1)   Dividends  of  corporations  whose  net  income  is  sub- 

ject to  Income  Tax,  or 

§7  (2)   Amounts    received    as    dividends    from    Personal 

Service  Corporations  upon  whose  income,  tax  has 
been  imposed  by  Act  of  Congress. 

9g  (b)  The  amount  received  as  intereL-t  on  obligations  of 

the  United  States  (Liberty  Bonds)  and  bonds  of  the 
War  Finance  Corporation,  which  is  included  in  the 
gross  income  reported  in  the  return  of  income  on 
which  the  tax  is  to  be  calculated. 

^  (c)    (1)   $1,000,  in  the  case  of  a  single  person,  or  married 

person  not  living  with  husband  or  wife; 


*ThiB  refers  to  the  surtax  table  for  individual  income.  Lower,  here, 
means  smaller.  If  income  subject  to  surtax  rates  for  1918,  1917  and  1916 
be  reported,  the  surtax  will  be  first  computed  on  1918  part  of  such  income; 
to  this  amount  will  then  be  added  the  1917  part  of  the  income.  The  effect 
of  this  is  to  have  tax  on  1918  part  of  the  income  at  lower  1918  surtax  rates 
than  would  be  the  <iase  if  the  operation  had  been  reversed.  (See  Table  III, 
part  III.)  ,  .  V  » 


Income  Tax  29 


(2)   $2,000  in  the  case  of  a  married  person  living  with  100 
husband  or  wife,  or  in  the  case  of  a  head  of  a 
family. 

(d)  $200  for  each  person  (other  than  husband  or  wife)    101 

,  dependent   upon   and   receiving   his   chief   support 

from  the  taxpayer — 

(1)  If  such  dependent  person  is  under  18  years  of  age.  102 

(2)  If  \such  dependent  person  is  incapable  of  self-sup-   103 
port    because    mentally    or    physically    defective, 
whether  over  or  under  18  years  of  age. 

The  rates  of  such  tax  are: — For  citizens  and  resident  aliens — 

For  1918—6%  upon  the  first  $4,000  of  such  excess,  and  104 

12%  on  the  remainder  of  such  excess. 

For  1919  and  subsequent  years — 4%  on  the  first  $4,000  of  such   105 
excess  and 

8%  upon  the  remainder  of  such 
excess. 
For  nonresident  aliens^  the  tax  is  12%  for  1918,  and  8%  for 
1919  and  subsequent  years,  without  any  exemption. 

(2)  Surtax: 

This  is  a  tax  on  the  entire  net  taxable. income  of  individuals   106 
in  excess  of  $5,000.    The  rates  of  such  tax  are: 
See  Table  on  page  30. 

(3)  Income  Tax  on  Corporate  Income: 

The  Income  Tax  shall  be  levied,  collected  and  paid  upon   107 
the  net  income  for  each  taxable  year  of  every  corporation. 
This  is  a  tax  on  the  net  income,  show'n  by  the  return,  which 
is  in  excess  of — 

Credits  Against  Income: 

(1)  The    amount   received    as    interest   upon    obligations    of   the   108 
United  States  (Liberty  Bonds)  and  bonds  of  the  War  Finance 
Corporation,  which  is  included  in  gross  income  in  the  return 

on  which  this  tax  is  to  be  calculated. 

(2)  The  amount  of  any  Excess  Profits  Tax  or  War  Profits  Tax  for  109 
the  same  taxable  year;  provided,  that  in  the  case  of  a  corpora- 
tion which  makes  return  for  a  fiscal  year  beginning  in  1917 
and  ending  in  1918,  in  computing  the  tax  as  provided  in  sec- 
tion 205  (a),  the  tax  computed  for  the  entire  period  under 
title  II  (Excess  Profits  Tax)  of  the  Revenue  Act  of  1917,  shall 

be  credited  against  the  net  income  computed  for  the  entire 
period  for  income  tax  (under  the  Revenue  Act  of  1916  as 
amended,  and  the  Revenue  Act  of  1917),  and  the  tax  computed 
for  the   entire   period   under   title   III    (War   Excess    Profits 


30 


Income  Tax 


Over 

Not  Over 

Taxable 

Rate  Tax 

1      "" 

Total  Tax 

$5,000 

$6,000 

$1  000 

1% 

$10 

$10    • 

6,000 

8,000 

2.000 

2 

40 

50 

8,000 

10,000 

3 

60 

110 

10,000 

12,000 

4 

80 

190 

12,000 

14,000 

5 

100 

290 

14.000 

16,000 

6 

120 

410 

16,000 

18,000 

7 

'           140 

550 

18.000 

20,000 

8 

160 

710 

20,000 

22,000 

9 

180 

890 

22.000 

24,000 

10 

200 

1,090 

24,000 

26,000 

11 

220 

1,310 

26.000 

28,000 

12 

240 

1,550 

2»fiOQ 

30,000 

13 

260 

l'^ 

30,000 

32,000 

14 

280 

2,090 

32,000 

34,000 

15 

300 

2,390 

34.000 

36,000 

16 

320 

2,710 

36,000 

38,000 

17 

340 

3,050 

38,000 

40.000 

5 

18 

360 

3,410 

40.000 

42.000 

s 

19 

380 

3,790 

42.000 

44,000 

each  g] 

20 

400 

4,190 

44,000 

46.000 

21 

420 

4.610 

46,000 

48,000 

22 

440 

5,050 

48,000 

50/N)0 

g 

23 

460 

5,510 

SO/XW 

S2/)00 

34 

480 

5,990 

52,000 

54,000 

8 

25 

500 

6,490 

54/)00 

56,000 

26 

520 

7,010 

56,000 

58,000 

^ 

27 

540 

7,550 

58,000 

tOflOQ 

28 

560 

8,110 

60,000 

62,000 

2 

29 

580 

8,690 

62,000 

64,000 

30 

600 

9,290 

64,000 

66,000 

31 

620 

9.910 

66,000 

68,000 

a 

32 

640 

10.550 

68,000 

70,000 

33 

660 

11,210 

zs-sss 

72,000 

34 

680 

11390 

72,000 

74,000 

35 

700 

12,590 

li^ 

76,000 

36 

720 

13.310 

2£'225 

78,000   • 

37 

740 

14^050 

78,000 

80,000 

38 

760 

14310 

22-522 

82,000 

39 

780 

15,590 

82,000 

84,000 

40 

800 

16,390 

84,000 

96fiO0 

41 

820 

17,210 

86.000 

88.000 

42 

840 

18,050 

22'222 

90,000 

43 

860 

18,910 

S'222 

92,000 

44 

880 

19,790 

92,000 

94,000 

45 

900 

20.690 

94.000 

96.000 

46 

920 

21.610 

06,000 

98,000 

; 

47 

940 

22,550 

96,000 

100,000 

2,000 

48 

960 

23.510 

J22'222 

"2'222 

50,000 

52 

26,000 

49.510 

150/100 

200/X)0 

50,000 

56 

28,000 

77,510 

200.000 

300,000 

100.000        i 

60 

60,000 

137,510 

iOO.000 

500,000 

200.000 

63 

126,000 

263,510 

500,000 
Over  1,000,000 

l/)00.000 

500,000 

64 

65             ■ 

320.000 

583,510 

See  pages  75  to  80  for  tables  combining  Normal  and  Surta,;x,  at 
rates  for  1918  and  1919. 


INCOME  Tax  31 

Tax)  of  the  Revenue  Act  of  1918  at  the  rates  prescribed  for 
the  calendar  year  1918,  shall  be  credited  against  the  net 
income  computed  for  the  entire  period  under  this  title  (Excess 
Profits  Tax). 

What  you  do  is  this:  Compute  net  income  under  the  law  in  no 
force  for  1917  income;  calculate  1917  excess  profits  tax;  take 
of  this  tax  for  credit  against  1917  part  of  income,  such  an 
amount  as  is  equal  to  the  proportion  of  time  in  1917  to  total 
time  covered  by  return.  Do  the  same  thing  for  1918  part  of 
the  income.  The  sum  of  the  two  apportionments  for  credit 
will  be  the  amount  of  the  excess  profits  credit  against  income 
for  the  fiscal  year,  for  purpose  of  income  tax. 

(3)   In  the  case  of  a  domestic  corporation,  $2,000.  Uj 

The  rates  of  this  tax  are: 

For  the   calendar  year   1918 —  12%    of  the   amount  of  the  fore-   112 

going  excess  of  net  income. 
For    the    calendar    year    1919  II3 

and      subsequent      calendar 

years —  10%  of  the  amount  of  such  ex- 

cess of  net  income. 

Special  rates  for  railroads  during  the  period  of  Federal  control — 

For  the  calendar  year  1918 —       10%   of  the  amount  of  foregoing   jj^ 

excess  is  special  income  tax. 
For  the  calendar  year  1919  and  jjg 

subsequent  calendar  years —  8%   of  such  excess  is  special  in- 
come tax. 

Just  how  these  special  rates  were  determined  is  not  apparent  from   jjg 
the  Revenue  Act.     These  special  rates  for  railroads  are  predicated 
on  the  Act  of  March  21,  1918,  entitled— 

"An  Act  to  provide  for  the  operation  of  transportation  sys- 
tems while  under  Federal  control,  for  the  just  compensation 
of  their  owners,  and  for  other  purposes." 

Section  1  of  this  Act  provides:  "...  that  during  the  117 
period  of  such  Federal  control  it  (the  railroad)  shall  receive  as  just 
compensation  an  annual  sum,  payable  from  time  to  time  in  reason- 
able instalments,  for  each  year  and  pro  rata  for  any  fractional  year 
of  such  Federal  control,  not  exceeding  a  sum  equivalent  as  nearly  as 
may  be  to  its  own  average  railway  operating  income  for  the  three 
years  ended  June  thirtieth,  nineteen  hundred  and  seventeen     .     .     . 

Every  such  agreement  shall  provide  that  any  Federal  Tax  jjg 
under  the  Act  of  October  third,  nineteen  hundred  and  seventeen,  or 
Acts  in  addition  thereto  or  in  amendment  thereof,  commonly  called 
War  Tax,  assessed  for  the  period  of  Federal  control  beginning 
January  first,  nineteen  hundred  and  eighteen,  or  any  part  of  said 
period,  shall  be  paid  by  the  carrier  out  of  its  own  funds,  or  shall 


32  Income  Tax 


be  charged  against  or  deducted  from  the  just  compensation;  that 
other  taxes  assessed  under  Federal  or  any  other  governmental  au- 
thority for  the  period  of  Federal  control  or  any  part  thereof  (not 
including,  however,  assessments  for  public  improvements  or  tax 
assessed  on  property  under  construction,  and  chargeable  under  the 
classification  of  the  Interstate  Commerce  Commission  to  investment 
in  road  equipment)  shall  be  paid  out  of  revenues  derived  from 
railway  operations  while  under  Federal  control;  that  all  taxes 
assessed  under  Federal  or  any  other  governmental  authority  for  the 
period  prior  to  January  first,  nineteen  hundred  and  eighteen,  when- 
ever leviable  or  payable,  shall  be  paid  by  the  carrier  out  of  its  own 
•funds,  or  shall  be  charged  against  or  deducted  from  just  compen- 
sation    .... 

119  Section  12.  That  moneys  and  other  property  derived  from 
the  operation  of  the  carriers  during  Federal  control  are  hereby 
declared  to  be  the  property  of  the  United  States.  Unless  otherwise 
directed  by  the  President,  such  money  shall  not  be  covered  into  the 
Treasury,  but  such  moneys  and  property  shall  remain  in  the  custody 
of  the  same  oflficers,  and  the  accounting  thereof  shall  be  made  in  the 
same  manner  and  form  as  before  Federal  control.  Disbursements 
therefrom  shall,  without  further  appropriation,  be  made  in  the  same 
manner  as  before  Federal  control,  etc.  .  .  ,  except  that  taxes 
under  titles  I  (Income  Tax)  and  II  (Excess  Profits  Tax)  of  the  Act 
entitled — 

"An  Act  to  provide  revenue  to  defray  war  expenses,  and  for 
other  purposes,"  (Approved  October  3,  1917) 

120  Or  any  Act  in  a^iton  thereto  or  in  amendment  thereof,  shall  be 
paid  by  the  carrier  out  of  its  own  funds.  If  Federal  control  begins  or 
ends  during  the  tax  year  for  which  any  taxes  so  chargeable  to 
railway  tax  accruals  are  assessed,  the  taxes  for  such  year  shall  be 
apportioned  to  the  date  of  the  beginning  or  ending  of  such  Federal 
control,  and  disbursements  shall  be  made  only  for  that  portion  of 
such  taxes  as  is  due  for  the  part  of  such  tax  year  which  falls 
within  the  period  of  Federal  control. 

121  For  this  reason  Section  230  (b)  of  the  Revenue  Law  provides  that 
the  Income  Tax  on  railroad  corporation  income,  in  the  proportions 
specified, 

"shall  be  treated  as  levied  by  an  Act  in  amendment  of  title 
I  of  the  Revenue  Act  of  1917." 

122  Thus  it  appears  that  the  Revenue  Act  of  1918  levies  income  tax  on 
railroad  compensation  or  rental  income  from  the  Government — 

Five-Sixths  of  the  tax  or  10%  for  1918 
and 

Four-Fifths  of  the  tax  or  8%  for  1919.      . 
How  the  remaining  2%  of  the  statutory  levy  is  to  be  provided  and 
handled  is  not,  perhaps,  pertinent  in  this  publication. 


Income  Tax  33 


Excess  Profits  Tax  or  War  Profits  Tax  on  Corporation  Income: 

The  Excess  Profits  Tax  for  1918  is :  123 

On  an  amount  of  the  net  income  not  in  excess  of 
20%  of  invested  capital,  less  Excess  Profits 
Tax  Credit,  $ ,  at 30% 

On  balance  of  net  income 65% 


Excess  Profits  Tax $ 

War  Profits  Tax:  124 

Net  income,  minus  War  Profits  Credit,  $- 


at  80%  = $, 

Less  Excess  Profits  Tax $. 


War  Profits  Tax $ 

For  1919  and  Subsequent  Years:  125 

On  an  amount  of  the  net  income  not  in  excess  of 
20%  of  invested  capital,  minus  Excess  Profits 

Credit,  $ ,  at  20%  = $ 

On  balance  of  net  income  at  40%  = $ 


Excess  Profits  Tax $ 


For  1918  tax,  the  Excess  Profits  Tax,  or  War-Excess  Profits  Tax,   126 
whichever  is  the  higher,  will  be  the  amount  of  tax  assessable  unless 
the  maximum  tax  applies. 

(For  maximum  tax  see  page  88.) 

As  between  the  War-Excess  Profits  Tax  and  the  Maximum  Tax,   127 
whichever  is  the  lower,  will  be  the  amount  of  tax  assessable. 

The  several  rates  of  tax  for  Income  Tax  and  War  Tax  are  grouped    128 
together  that  there  may  be  found  in  one  place  a  consideration  of  the 
several  taxes  which  may  be  assessed  on  income. 

DEDUCTIONS— DEFINITION  :— 

A  deduction  is  an  expenditure  made  as  an  incident  to  the  creation   129 
of  income  or  is  a  recoupment  out  of  income  for  the  purpose  of  re- 
storing capital  or  keeping  capital  at  par. 

Credits : 

The  sum  of  the  deductions  having  been  subtracted  from  the  gross  130 
income  carried  into  the  return  and  the  net  income  thus  ascer- 
tained— certain  other  deductions  from  net  income,  technically  called 
credits,  are  provided  for  and  permitted.  The  tax  in  respect  of  which 
a  credit  is  allowed  is  then  calculated  on  the  remainder  of  net  income 
after  deduction  of  the  credit. 

There  are  credits  or  deductions  from' net  income  and  there  are   131 
credits  on  account  of  tax  paid  by  the  taxpayer  or  for  tax  of  the 


34  Income  Tax 


taxpayer  collected  by  the  Government  through  withholding  at  the 
source. 

132  Credits  against  net  income  reduce  the  amount  of  income  on  which 
tax  is  to  be  calculated. 

1st  Credits  against  tax  reduce  the  amount  of  tax  which  the  taxpayer 
is  required  to  pay  on  the  face  of  the  return  in  which  the  credit  is 
taken. 

134  The  deductions  or  items,  the  sum  of  which  is  to  be  deducted  from 
gross  income  for  the  purpose  of  ascertaining  the  net  income  of  indi- 
viduals and  estates  or  trusts  are: 

(1) 

135  (a)   All  the  ordinary  and  necessary  expenses  paid  or  incurred 

during  the  taxable  year  in  carrying  on  any  trade  or  busi- 
ness, including — 

136  (b)  A  reasonable  allowance  for  salaries  and  other  compen- 

sation for  personal  services  actually  rendered,  and 

137  (c)   Including  rentals  or  other  payments  required  to  be  made 

as  condition  to  the  continued  use  or  possession,  for  pur- 
poses of  the  trade  or  business,  of  property  to  which  the 
taxpayer  has  not  taken  title  or  is  not  taking  title  or  in 
which  he  has  no  equity. 

(2) 

138  (a)  All  interest  paid  or  accrued  within  the  taxable  year  on 

indebtedness  except  on  indebtedness  incurred  or  con- 
tinued to  purchase  or  carry  obligations  or  securities — 
other  than  obligations  of  the  United  States  issued  after 
September  24,  1917'— the  interest  upon  which  is  wholly 
exempt  from  taxation  under  the  Income  Tax  Law  as  in- 
come to  the  taxpayer, 

or 

139  (b)  In  the  case  of  a  nonresident  alien  individual,  the  propor- 

tion of  such  interest  which  the  amount  of  his  gross  in- 
come from  sources  within  the  United  States  bears  to  the 
amount  of  his  gross  income  from  all  sources  within  and 
without  the  United  States. 

140  (3)  Taxes  paid  or  accrued  within  the  taxable  year  imposed — 

(a)  By  the  authority  of  the  United  States,  except  Income,  War 
Profits  and  Excess  Profits  taxes; 

or 

141  (b)  By  the  authority  of  any  of  its  possessions,  except  the 
amount  of  Income,  War  Profits  and  Excess  Profits  Taxes 

»ThlR  means  that  all  Interest  on  Indebtedness  Incurred  or  continued  for  the  pur- 
chase of  Mborty  Bonds  may  be  deducted,  even  though  part  of  such  interest  ia 
exempt  from  all  tax. 


Income  Tax  35 


allowed  as  a  credit  against  the  tax  calculated  on  the  re- 
turn, in  accordance  with  the  provisions  of  Section  222: 

or 

(c)  By  the  authority  of  any  state  or  territory,  or  any  county.   142 
school  district,  municipality  or  other  taxing  subdivision 

of  any  state  or  territory,  not  including  those  assessed 
against  local  benefits  of  a  kind  tending  to  increase  the 
value  of  the  property  assessed; 

or 

(d)  In  the  case  of  a  citizen  or  resident  of  the  United  States,    143 
by   the    authority    of    any    foreign    country,    except    the 
amount  of  Income,  War  Profits  and  Excess  Profits  Taxes 
allowed  as  a  credit  on  the  taxes  calculated  under  the 
return  in  accordance  with  the  provisions  of  Section  222;       ^ 

or 

(e)  In   the   case   of   a   nonresident   alien    individual,   by   the   144 
authority  of  any  foreign   country    (except   Income,  War 
Profits  and  Excess  Profits  Taxes  and  tax  assessed  against 
local  benefits  tending  to  increase  the  value  of  the  prop- 
erty assessed),  upon  property  or  business. 

(4)  Losses  sustained  during  the  taxable  year  and  not  compen-   145 
sated  for  by  insurance  or  otherwise,  if  incurred  in  trade  or  business. 

These  are  business  losses. 

(5)  Losses  sustained  during  the  taxable  year  and  not  compen-   146 
sated  for  by  insurance  or  otherwise,  if  incurred  in  any  transaction 
entered  into  for  profit,  though  not  connected  with  the  trade  or  busi- 
ness, but  in  the  case  of  a  nonresident  alien  individual  only  as  to 
such  transactions  within  the  United  States. 

These  are  losses  outside  of  the  business — speculation  or  invest- 
ment— and  is  the  provision  corresponding  to  Section  5  (a)  of  the 
Revenue  Act  of  1916  as  amended  by  the  Revenue  Act  of  1917. 

(6)  Losses   sustained   during  the  taxable  year  on   property  not   147 
connected  with  the  trade  or  business    (but  in  the  case  of  a  non- 
resident alien  individual  only  property  within  the  United  States)  if 
arising  from   fires,   storms,   shipwreck  or  other  casualty,   or  from 
theft,  and  if  not  compensated  for  by  insurance  or  otherwise. 

These  are  losses  of  property  outside  of  the  business  and  might 
be  of  investments  or  speculative  property. 

For  net  losses,  see  page  12  and  Section  204  of  the  statute.  148 

(7)  Debts  ascertained  to  be  worthless  and  charged  off  within  the   149 
taxable  year. 

(8)  A  reasonable  allowance  for  the  exhaustion,  wear  and  tear  of   150 
property  used  in  the  trade  or  business,  including  a  reasonable  allow- 
ance for  obsolescence^ 


36  Income  Tax 


151  (9)  In  the  case  of  buildings,  machinery,  equipment  or  other  facili- 
ties constructed,  erected,  installed  or  acquired  on  or  after  April  6, 
1917,  for  the  production  of  articles  contributing  to  the  prosecu- 
tion of  the  present  war,  and  in  the  case  of  vessels  constructed  or 
acquired  on  or  after  such  date  for  the  transportation  of  articles  or 
men  contributing  to  the  prosecution  of  the  present  war,  there  shall 
be  allowed  a  reasonable  deduction  for  amortization  for  such  part 
of  the  cost  of  such  facilities  or  vessels  as  has  been  borne  by  the 
taxpayer,  but  not  again  including  any  amount  allowed  under  this 
title  or  previous  Acts  of  Congress  as  a  deduction  in  computing  net 
income.  At  any  time  within  three  years  after  the  termination  of 
the  present  war,  the  Commissioner  may,  and  at  the  request  of  the 
taxpayer  shall,  re-examine  the  returns,  and  if  he  then  finds  as  a 
result  of  an  appraisal  or  from  other  evidence  that  the  deduction 

#  originally  allowed  was  incorrect,  the  tax,  imposed  by  this  title 
(Income  Tax)  and  by  title  III  (Excess  Profits  Tax)  for  the  year  or 
years  affected,  shall  be  redetermined;  and  the  amount  of  tax  due 
upon  such  redetermination,  if  any,  shall  be  paid  on  notice  and 
demand  by  the  Collector,  or  the  amount  of  tax  overpaid,  if  any, 
shall  be  credited  or  refunded  to  the  taxpayer  in  accordance  with  the 
provisions  of  Section  252. 

152  (10)  In  the  case  of  mines,  oil  and  gas  wells,  or  other  natural 
deposits  and  timber,  a  reasonable  allowance  for  depletion  and  for 
depreciation  of  improvements,  according  to  the  peculiar  conditions 
in  each  case  based  upon  cost,  including  cost  of  development  not 
otherwise  deducted;  Provided,  that  in  the  case  of  such  properties 
acquired  prior  to  March  1,  1913,  the  fair  market  value  of  the  prop- 
erty (or  the  taxpayer's  interest  therein)  on  that  date  shall  be  taken 
in  lieu  of  cost  up  to  that  date;  Provided  further,  that  in  the  case  of 
mines,  oil  and  gas  wells,  discovered  by  the  taxpayer  on  or  after 
March  1,  1913,  and  not  acquired  as  the  result  of  purchase  of  a 
proven  tract  or  lease,  where  the  fair  market  value  of  the  property 
is  materially  disproportionate  to  the  cost,  the  depletion  allowance 
shall  be  based  upon  the  fair  market  value  of  the  property  at  the 
date  of  discovery,  or  within  thirty  days  thereafter;  such  reasonable 
allowance  in  all  the  above  cases  to  be  made  under  rules  and  regu- 
lations prescribed  by  the  Commissioner  with  the  approval  of  the 
Secretary.  In  the  case  of  leases,  the  deductions  allowed  by  this 
paragraph  shall  be  equitably  apportioned  between  the  lessor  and 
lessee.* 

158  (11)  Contributions  or  gifts  made  within  the  taxable  year  to 
corporations  organized  and  operated  exclusively  for  religious,  chari- 
table, scientific  or  educational  purposes,  or  for  the  prevention  of 
cruelty  to  children  or  animals  (no  part  of  the  net  earnings  of  which 
inures  to  the  benefit  of  any  private  stockholder  or  individual),  or 
to  the  special  fund  for  vocational  rehabilitation  authorized  by  Sec- 


*See  note  under  paragrraph  187. 


Income  Tax  37 


tion  7  of  the  Vocational  Rehabilitation  Act,*  to  an  amount  not  in 
excess  of  fifteen  per  centum  of  the  taxpayer's  net  income  as  com- 
puted without  the  benefit  of  this  paragraph.  Such  contributions  or 
gifts  shall  be  allowable  as  deductions  only  if  verified  under  rules 
and  regulations  prescribed  by  the  Commissioner  with  the  approval 
of  the  Secretary.  In  the  case  of  a  nonresident  alien  individual,  this 
deduction  shall  be  allowed  only  as  of  contributions  or  gifts  made  154 
to  domestic  corporations,  or  to  such  Vocational  Rehabilitation  Fund. 

Special  Loss: 

(12) 

(a)  At  the  time  of  filing  returns  for  the  taxable  year  1918  a  155 
taxpayer  may  file  a  claim  in  abatement  based  on  the  fact 
that  he  has  sustained  a  substantial  loss  (whether  or  not 
actually  realized  by  sale  or  other  disposition)  resulting 
from  any  material  reduction  (not  due  to  temporary  fluc- 
tuation) of  the  value  of  the  inventory  for  such  taxable 
year,  or  from  the  actual  payment  after  the  close  of  such 
taxable  year  of  rebates  in  pursuance  of  contracts  entered 
into  during  such  year  upon  sales  made  during  such  year. 

In  such  case  payment  of  the  amount  of  the  tax  covered 
by  such  claim  shall  not  be  required  until  the  claim  is 
decided,  but  the  taxpayer  shall  accompany  his  claim  with 
a  bond  in  double  the  amount  of  the  tax  covered  by  the 
claim,  with  sureties  satisfactory  to  the  commissioner, 
conditioned  for  the  payment  of  any  part  of  such  tax  found 
to  be  due,  with  interest.  If  any  part  of  such  claim  is 
disallowed  then  the  remainder  of  the  tax  due  shall 
on  notice  and  demand  by  the  collector  be  paid  by  the 
taxpayer  with  interest  at  the  rate  of  1  per  centum  per 
month  from  the  time  the  tax  would  have  been  due  had  no 
such  claim  been  filed.  If  it  is  shown  to  the  satisfaction 
of  the  commissioner  that  such  substantial  loss  has  been 
sustained,  then  in  computing  the  tax  imposed  by  this  title 
the  amount  of  such  loss  shall  be  deducted  from  the  net 
income. 

(b)  If  no  such  claim  is  filed,  but  it  is  shown  to  the  satisfac-  156 
tion  of  the  commissioner  that  during  the  taxable  year 
1919  the  taxpayer  has  sustained  a  substantial  loss  of  the 
character  above  described  then  the  amount  of  such  loss 
shall  be  deducted  from  the  net  income  for  the  taxable 


*(Pub.  No.  178.  65th  Cong.  S-4557— Vocational  Rehabilitation  Act  for  Maimed 
and  Disabled  Soldiers.) 

Sect.  7.  That  the  board  (Federal  Board  for  Vocational  Education)  is  hereby- 
authorized  and  empowered  to  receive  such  gifts  and  donations  from  either  public 
or  private  soui'ces  as  may  be  offered  unconditiona'lly.  All  moneys  received  as  gifts 
or  donations  shall  be  paid  into  the  Treasury  of  the  United  States,  and  shall  con- 
stitute a  permanent  fund,  to  be  called  the  "Special  fund  for  vocational  rehabil- 
itation." to  be  used  under  the  direction  of  the  said  board,  in  connection  v^^ith  the 
appropriations  hereby  made  or  hereafter  to  be  made,  to  defray  the  expenses  of  pro- 
viding and  maintaining  courses  of  vocational  rehabilitation  ;  and  a  full  report  of 
all  gifts  and  donations  offered  and  accepted,  and  all  disbursements  therefrom,  shall 
be  submitted  annually  to  Congress  by  said  board. 


38  Income  Tax 

year  1918  and  the  tax  imposed  by  this  title  for  such  year 
shall  be  redetermined  accordingly.  Any  amount  foun.l 
•  to  be  due  to  the  taxpayer  upon  the  basis  of  such  redetei- 
mination  shall  be  credited  or  refunded  to  the  taxpayer  in 
accordance  with  the  provisions  of  Section  252. 

Deductions  in  Returns  of  Nonresident  Aliens: 

157  In   the   case   of   a   nonresident   alien    individual,   the   deductions 
allowed  in  paragraphs — 

(1)  for  expenses 

(4)  for  interest 

(7)  bad  debts 

(8)  depreciation 

(9)  war  depreciation 
(10)  depletion 

(12)  special  losses  as  herein  before  set  out 
shall  be  allowed  only  if  and  to  the  extent  that  they  are  connected 
with  income  arising  from  a  source  within  the  United  States;  and 
the  proper  apportionment  and  allocation  of  the  deductions  with 
respect  to  source  of  income  within  and  without  the  United  States 
shall  be  determined  under  rules  and  regulations  prescribed  by  the 
Commissioner  with  the  approval  of  the  Secretary. 

Items  Not  Deductible: 

158  In  computing  net  income,  no  deductions  shall  be  allowed  in  any 
case  in  respect  of — 

159  (a)  Personal,  living  or  family  expenses; 

160  (b)  Any  amount  paid  out  for  new  buildings;  or  for  permanent 

improvements  or  betterments  made  to  increase  the  value  of 
any  property  or  estate; 

161  (c)  Any  amount  expended  in  restoring  property  or  in  making 

good  the  exhaustion  thereof  for  which  an  allowance  is  or 
has  been  made; 

162  W  Premiums  paid  on  any  life  insurance  policy  covering  the 

life  of  any  officer  or  employee,  or  of  any  person  financially 
interested  in  any  trade  or  business  carried  on  by  the  tax- 
payer, when  the  taxpayer  is,  directly  or  indirectly,  a  bene- 
ficiary under  such  policy. 

Form  of  Return  for  Individuals   (1040- A,  for  incomes  of  $5,000  or 
less;  1040  for  all  over  $5,000) ; 

108       The  return  is  to  be  made  on  the  form  prescribed  by  the  Commis- 
sioner of  Internal  Revenue.     As  previously  noted,  it  is  to  include: 

(1)  The  gross  income  from  all  sources  of  a  taxable  class; 

(2)  The  deductions  provided  by  law; 

(3)  The  difference  between  the  sum  of  (1)  and  (2),  which  is 
the  net  income; 


Income  Tax  89 


Credits  Against  Income  (for  calculation  of  normal  tax)  :  164 

(4)  From  this  difference  or  net  income  (for  the  purpose  of  the 
Normal  Income  Tax  to  individuals)  the  following  credits, 
the  sum  of  which  is  to  be  deducted  from  the  net  income — 

(a)  The  amount  received  as  dividends  from  a  corporation 
whose  income  is  subject  to  Income  Tax,  and  amounts 
received  as  dividends  from  a  Personal  Service  Cor- 
poration out  of  earnings  or  profits  upon  which  In- 
come Tax  has  been  imposed  by  Act  of  Congress ; 

(b)  The  amount  received  as  interest  upon  obligations  of 
the  United  States  and  bonds  issued  by  the  War 
Finance  Corporation  which  is  included  in  gross  in- 
come under  Section  213  (4d) ; 

(c)  (1)   In  the  case  of  a  single  person  or  estate  or  trust, 

$1,000; 

or 
(2)  In  case  of  a  head  of  a  family  or  a  married  per- 
son living  with  husband  or  wife,  $2,000. 
A  husband  and  wife  living  together  shall  receive 
but  one  personal  exemption  of  $2,000  against  their 
aggregate  net  income;  and  in  case  they  make  sepa- 
rate returns,  the  personal  exemption  of  $2,000  may 
be  taken  by  either  or  divided  between  them,  as  they 
may  agree. 

(d)  $200  for  each  person  (other  than  husband  or  wife) 
dependent  upon  and  receiving  his  chief  support  from 
the  taxpayer,  if  such  dependent  person  is  under  18 
years  of  age  or  is  incapable  of  self-support  because 
mentally  or  physically  defective; 

(e)  In  the  case  of  a  nonresident  aliei?  individual  who  is 
a  citizen  or  subject  of  a  country  which  imposes  an 
income  tax,  the  credits  allowed  in  (c)  (personal  ex- 
emption) and  (d)  (for  dependents)  shall  be  allowed 
only  if  such  country  allows  a  similar  credit  to  citi- 
zens of  the  United  States  not  residing  in  such  coun- 
try ; 

(5)  The  Normal  Income  Tax; 

(6)  The  Surtax; 

(7)  The  total  tax; 

Credits  Against  Tax:  165 

(8)  The  following  credits  for  tax  paid  (the  sum  of  which  is  to  be 
deducted  from  the  total  tax)  : 

(a)  The  amount  of  tax  collected  at  the  source ; 


40  Income  Tax 


(b)  (1)  In  the  case  of  a  citizen  of  the  United  States,  the 
amount  of  Income,  War  Profits  and  Excess 
Profits  Taxes  paid  during  the  taxable  year  to  any 
foreign  country,  from  income  derived  from 
sources  therein,  or  to  any  possession  of  the 
United  States;  and 

(2)  In  the  case  of  a  resident  of  the  United  States, 
the  amount  of  any  such  taxes  paid  during  the 
taxable  year  to  any  possession  of  the  United 
States,  because  in  both  (1)  and  (2)  such  income 
will  have  been  included  in  the  return;  and 

(3)  In  the  case  of  an  alien  resident  of  the  United 
States  who  is  a  citizen  or  subject  of  a  foreign 
country,  the  amount  of  any  such  tax  paid  during 
the  taxable  year  to  such  country,  from  income 
derived  from  sources  in  the  foreign  country,  if 
such  country,  in  imposing  such  taxes  allows  a 
similar  credit  to  citizens  of  the  United  States 
residing  in  such  country;  and 

(4)  In  the  case  of  any  such  individual,  who  is  a  mem- 
ber of  a  partnership  or  beneficiary  of  a  trust  or 
estate  including  his  share  of  income  from  that 
source  in  his  personal  return  for  tax,  he  may 
have  his  proportionate  share  of  the  taxes  paid  to 
a  foreign  country  or  to  a  possession  of  the  United 
States  during  the  taxable  year  by  the  partner- 
ship or  by  the  estate  or  trust.* 

Adjustment  Provision  When  Accrual  Basis  Is  Used  or  in  Case  of 

Refund  of  Tax  Paid 

166  If  the  tax  sought  to  be  used  as  a  credit  is  on  an 

accrual  basis,  instead  of  having  been  actually  paid, 
the  Commissioner  may  require  (as  a  condition  prece- 
dent) of  the  taxpayer  a  bond  with  satisfactory  sure- 
ties, in  such  penal  sum  as  he  may  designate,  condi- 
tioned for  the  payment  by  the  taxpayer  of  any  amount 
of  tax  found  due  upon  re-determination  because  the 
actual  amount  of  tax  to  a  foreign  country  or  pos- 
session of  the* United  States  may  be  reduced  on  actual 
payment  from  the  amount  of  credit  claimed  on  the 
accrual  basis  in  his  return  by  the  taxpayer. 
As  a  condition  also  of  the  allowance  of  a  credit  for 


•There  would  appear  to  be  an  advantage  in  this  because  net  income  of  the 
parlnerHhlp  or  estate  or  trust  will  have  been  determined  in  part  bv  the  deduction 
of  thl8  tax.  It  is  the  net  inrome  which  Is  divisible  between  the  partners  or  bene- 
ficiaries The  reduction  of  his  tax  payal)le  to  the  TTnlted  States  bv  the  amount 
of  his  share  of  foreign  tax  paid  by  the  partnership  or  estate  or  trust  (even  though 
such  tax  may  have  been  in  regpect  of  foreign  income),  is  equivalent  to  an  addi- 
tional eNf  nipt  ion  of.  Income  from  tax. 


Income  Tax  41 


such  tax,  when  such  tax  has  been  actually  paid,  the 
taxpayer  undertakes  to  notify  the  Commissioner  of 
the  fact  of  any  refund  of  such  tax. 
:        ^  In  either  of  the  two  cases  above,  the  amount  by 

#  which  the  credit  allowed  is  reduced  must  be  added 

f  to  the  income  tax  due  on  the  return.    Any  increased 

;        ^i;  tax  found  due  upon  such  redetermination  of  tax  due 

;       iS.  from  the  taxpayer  is  to  be  paid  by  him  on  notice  and 

-r  demand  from  the  Collector.     If  upon  any  such  rede- 

'^  termination  it  is  found  that  tax  due  to  the  United 

^  States  has  been  overpaid,  the  amount  of  such  over- 

payment shall  be  credited  or  refunded  to  the  tax- 
payer in  accordance  with  the  provisions  of  Section 
252. 

These  credits  shall  be  allowed  only  if  the  taxpayer 
furnishes  evidence  satisfactory  to  the  Commissioner 
showing  the  amount  of  income  derived  from  sources 
within  which  such  foreign  country  or  such  possession 
of  the  United  States,  and  all  other  information  neces- 
sary for  the  computation  of  «such  credits. 
(9)  The  difference  between  (7)  and  (8),  which  is  the  amount 
of  the  tax  to  be  paid  by  or  for  the  taxpayer. 

PARTNERSHIP  RETURNS: 

While  partnerships,  per  se,  are  not  taxable  entities  except  in  167 
so  far  as  they  may  be  required  to  answer  for  Excess  Profits  Tax 
under  the  provisions  of  the  Revenue  Act  of  1917,  they  are  required 
to  make  returns  of  income  on  form  1065  and  to  show  by  such  return 
the  particulars  of  income  and  partnership  interest.  This  partner- 
ship interest  is  to  be  accounted  for  in  the  personal  return  of  the 
partner,  and  the  partnership  return  will  be  available  for  check 
against  the  personal  return. 

ESTATES  OR  TRUSTS: 

The  income  of  estates  or  trusts  is  taxed  as  for  a  single  individual   168 
in  three  cases — 

(1)  In  the  case  of  income  received  by  estates  or  trusts  during 
the  period  of  administration  or  settlement  of  the  estate; 

(2)  In  the^ase  of  income  accumulated  in  trust  for  the  benefit 
of  unborn  or  unascertained  persons  or  persons  with  con- 

•   tingent  interests; 

(3)  In  the  case  of  income  held  for  future  distribution  under  the 
terms  of  a  will  or  trust. 

In   each  of  these  cases,  the  fiduciary  shall  be  responsible  for  109 
making  a  return  of  income  for  the  trust  or  estate  for  which  he  acts. 
The  tax  shall  be  imposed  upon  the  net  income  of  the  trust  as  ascer- 
tained by  such  return  and  the  tax  shall  be  paid  by  the  fiduciary, 
except  that  in  determining  the  net  income  of  the  estate  during  the 


42  Income  Tax 


period  of  administration,  there  may  be  deducted  the  amount  of 
any  income  properly  paid  or  credited  to  any  legatee,  heir  or  other 
beneficiary,  and  the  tax  shall  then  be  computed  on  the  remainder 
of  such  income  as  for  the  estate  or  trust  and  said  tax  shall  be  paid 
by  the  fiduciary. 

170  When  the  income  of  the  estate  or  trust  is  to  be  distributed 
to  the  beneficiaries  periodically,  whether  or  not  at  regular  inter- 
vals, and  when  the  income  of  an  infant  is  collected  by  the  guardian 
of  such  infant  and  is  to  be  held  or  distributed  as  the  Court  may 
direct — in  such  cases,  the  fiduciary  or  guardian  shall  be  responsible 
for  making  the  return  of  income  for  the  trust  or  estate  and  also  for 
the  infant.  The  net  income  shall  be  computed  in  the  same  manner 
and  on  the  same  basis  as  for  an  individual.  In  both  such  cases, 
there  shall  be  made  on  the  fiduciary  return,  a  statement  of  each  bene- 
ficiary's distributive  share  of  such  net  income,  whether  or  not  dis- 
tributed before  the  close  of  the  taxable  year  in  which  the  return 
is'  made.  The  distributive  share  of  a  beneficiary  being  thus  ascer- 
tained and  stated,  shall  be  included  in  his  personal  return  of  income, 
to  be  made  by  or  for  him,  for  the  accounting  period  of  such  bene- 
ficiary in  which  the  accounting  period  of  the  estate  or  trust  shall 
end.     In  such  cases  the  beneficiary,  for  the  purpose  of  the  Normal 

■  Tax,  shall  be  allowed  as  credits  in  addition  to  the  credits  allowed 
him  under  Section  216  [p.  75],  his  proportionate  share  of  dividends 
and  Liberty  Bond  interest  as  are  received  by  the  estate  or  trust  and 
the  tax  as  ascertained  on  the  beneficiary's  return  shall  be  paid  by  the 
beneficiary.  When  the  tax  is  paid  by  the  beneficiary,  there  will 
be  no  tax  assessed  to  or  paid  by  the  fiduciary. 

Profits  of  Corporations  Other  Than  Personal  Service  Corporations 
When  Taxable  to  the  Stockholders: 

171  Whenever  a  corporation,  other  than  a  Personal  Service  Cor- 
poration, is  formed  or  availed  of  for  the  purpose  of  preventing  the 
imposition  of  the  Surtax  upon  its  stockholders  or  members  through 
the  medium  of  permitting  its  gains  or  profits  to  accumulate  instead 
of  being  divided  or  distributed,  such  corporation  shall  not  be  sub- 
ject to  Income  Tax,  Excess  Profits  or  War  Profits  Tax,  as  the  case 
may  be,  but  the  tax  on  such  income  shall  b«  assessed  to  the  stock- 
holders or  mfimbers  of  such  corporation  in  the  same  manner  as  pro- 
vided in  subdivision  (e)  of  Section  218  in  the  case*of  stockholders 
of  a  Personal  Service  Corporation.  The  fact  that  any  corporation  is 
merely  a  holding  company,  or  that  the  gains  or  profits  are  per- 
mitted to  accumulate  beyond  the  reasonable  needs  of  the  business 
shall  be  prima  facie  evidence  of  a  conspiracy  to  escape  the  sur- 
tax, and  this  presumption  shall  be  conclusive  when  the  Com- 
missioner certifies  that,  in  his  opinion,  such  accumulation  is  un- 
reasonable for  the  purposes  of  the  business.  When  requested 
by  the  Commissioner,  or  any  collector,  every  corporation  shall  for- 
ward to  him  a  correct  statement  of  such  gains  and  profits  and  the 


Income  Tax  43 


names  apd  addresses  of  the  shareholders  who  would  be  entitled  to 
the  same  if  divided  or  distributed,  and  the  amounts  which  would  be 
payable  to  each. 

Income  of  a  Corporation: 

The  gross  income  of  a  corporation  is  the  same  as  for  an  indi-  172 
vidual.  Net  income  of  a  corporation  is  the  difference  between  its 
gross  income  and  the  sum  of  the  deductions  allowed  by  law  to  a 
corporation.  The  net  income  is  to  be  computed  on  the  same  basis 
and  with  the  same  regard  to  the  time  covered  by  the  return  as  is 
provided  in  Section  212   (b)  and  in  Section  226  for  an  individual. 

Income  of  a  Foreign  Corporation: 

In  the  case  of  a  foreign  corporation,  gross  income  includes  173 
only  the  gross  income  from  sources  within  the  United  States,  includ- 
ing the  interest  on  bonds,  notes,  or  other  interest-bearing  obliga- 
tions of  residents,  corporate  or  otherwise,  dividends  from  resident 
corporations,  and  including  all  amounts  received  (although  paid 
under  a  contract  for  the  sale  of  goods  or  otherwise)  representing 
profits  on  the  manufacture  and  disposition  of  goods  within  the 
United  States. 

Deductions  Allowed  to  Corporations: 

In  computing  the  net  income  of  a  corporation  subject  to  the  tax 
imposed  by  Section  230  (Income  Tax),  there  shall  be  allowed  as 
deductions — 

(1)  All  ordinary  and  necessary  expenses  paid  or  incurred  dur-  174 
ing  the  taxable  year  in  the  carrying  on  any  trade  or  busi- 
ness, including  a  reasonable  allowance  for  salaries  or 
other  compensation  for  personal  services  actually  ren- 
dered, including  rentals  or  other  payments  required  to  be 
made  as  a  condition  to  the  continued  use  or  possession  of 
property  to  which  the  corporation  has  not  or  is  not  taking 
title,  or  in  which  it  has  no  equity; 

(2)  All  interest  paid  or  accrued  within  the  taxable  year  on  175 
its  indebtedness,  except  on  indebtedness  incurred  or  con- 
tinued to  purchase  or  carrying  obligations  or  securities 
(other  than  obligations  of  the  United  States  issued  after 
September  24,  1917)*  the  interest  upon  which  is  wholly 
exempt  from  taxation  as  income  to  the  taxpayer,  or,  in  the 
case  of  a  foreign  corporation,  the  proportion  of  such  inter- 
est which  the  amount  of  its  gross  income  from  sources 
within  the  United  States  bears  to  the  amount  of  its  gross  . 

•See  note  on  page  35. 


44  •  Income  Tax 


income  from  all  sources  within  and  without  the  United 
States : 

176  (3)  Taxes  paid  or  accrued  within  the  taxable  year  imposed — 

177  (a)  By  the  authority  of  the  United  States   (except  In- 

come, War  Profits  and  Excess  Profits  Taxes) ; 

178  (b)  By  the  authority  of  any  of  its  possessions   (except 

the   amount   of   Income,   War   Profits    and    Excess 
Profits  Taxes)  allowed  as  a  credit  for  taxes  under 
Section  238  to  be  taken  after  the  calculation  of  tax 
is  made  on  the  return: 
or 

179  (c)  By  the  authority  of  any  state  or  territory,  or  any 

county,  school  district,  municipality,  or  other  taxing 
subdivision  of  any  state  or  territory,  not  including 
those  assessed  against  local  benefits  of  a  kind  tend- 
ing to  increase  the  value  of  the  property  assessed ; 

180  (d)  In  the  case  of  a  domestic  corporation,  by  the  author- 

ity of  any  foreign  country    (except  the  amout  of 
Income,   War    Profits    and    Excess    Profits    Taxes), 
allowed  as  a  credit  under  Section  238  to  be  taken 
after  calculation  of  tax  on  return; 
or 

181  (e)  In  the  case  of  a  foreign  corporation,  by  authority  of 

any  foreign   country    (except  Income,  War  Profits 
and  Excess  Profits  Taxes,  and  the  taxes  assessed 
against  local  benefits  of  a  kind  tending  to  increase 
'  •  the  value  of  the  property  assessed),  upon  the  prop- 

erty or  business: 

Provided,  that  in  the  case  of  obligors  specified  in 
subdivision  (b)  of  Section  221  (debtor  corporations 
as  withholding  agents  in  connection  with  tax  cove- 
nant bonds)  no  deduction  for  the  payment  of  the 
tax  imposed  by  this  title  (Income  Tax)  or  any  other 
tax  paid  pursuant  to  the  contract  or  provision  re- 
ferred to  in  that  subdivision  shall  be  allowed. 

182  (4)  Losses  sustained  during  the -taxable  year  and  not  compen- 

sated for  by  insurance  or  otherwise; 

188  (5)   Debts  ascertained  to  be  worthless  and  charged  off  within 

the  taxable  year; 

184  (6)  Amounts  received  as  dividends  from  a  corporation  which 

is  taxable  under  this  title  upon  its  net  income,  and  amounts 
received  as  dividends  from  a  Personal  Service  Corporation 
out  of  earnings  or  profits  upon  which  Income  Tax  has  been 
imposed  by  Act  of  Congress; 


Income  Tax  45 


(7)  A  reasonable  allowance  for  the  exhaustion,  wear  and  tear  185 
of  property  used  in  the  trade  or  business,  including  a  rea- 
sonable allowance  for  obsolescence. 

(8)  In  the  case  of  buildings,  machinery,  equipment  or  other   186 
facilities   constructed,   erected,   installed,   or  acquired,  on 

or  after  April  6,  1917,  for  the  production  of  articles  con- 
tributing to  the  prosecution  of  the  present  war,  and  in  the 
case  of  vessels  constructed  or  acquired  after  such  date  for 
the  transportation  of  articles  or  men  contributing  to  the 
prosecution  of  the  present  war,  there  shall  be  allowed  a 
reasonable  deduction  for  the  amortization  of  such  part  of 
the  cost  of  such  facilities  or  vessels  as  has  been  borne  by 
the  taxpayer,  but  not  again  including  any  amount  other- 
wise allowed  under  this  title  or  previous  acts  of  Congress 
as  a  deduction  in  computing  net  income.  At  any  time 
within  three  years  after  the  termination  of  the  present  war 
the  Commissioner  may,  and  at  the  request  of  the  taxpayer 
shall,  re-examine  the  return,  and  if  he  then  finds  as  a 
result  of  an  appraisal  or  from  other  evidence  that  the 
deduction  originally  allowed  was  incorrect,  the  tax  im- 
posed by  this  title  (Income  Tax)  and  by  title  III  (War 
Profits  Tax)  for  the  year  or  years  affected  shall  be  re- 
determined ;  and  the  amount  of  tax  due  upon  such  redeter- 
mination, if  any,  shall  be  paid  upon  notice  and  demand  by 
the  collector,  or  the  amount  of  tax  overpaid,  if  any,  shall 
be  credited  or  refunded  to  the  taxpayer  in  accordance  with 
the  provisions  of  Section  252. 

(9)  In  the  case  of  mines,  oil  and  gas  wells,  other  natural  de-    187 
posits,  and  timber,  a  reasonable  allowance  for  depletion 
and  for  depreciation  of  improvements,   according  to  the 
peculiar  conditions  in  each  case,  based  upon  c^t  including 
cost  of  development  not  otherwise  deducted: 

Provided,  that  in  the  case  of  such  properties- acquired  prior 
to  March  1,  1913,  the  fair  market  value  of  the  property  (or 
the  taxpayer's  interest  therein)  on  that  date  shall  be  taken 
in  lieu  of  cost  up  to  that  date: 

Provided  further,  that  in  the  case  of  mines,  oil  and  gas 
wells,  discovered  by  the  taxpayer,  on  or  after  March  1, 
1913,  and  not  acquired  as  a  result  of  purchase  of  a  proven 
tract  or  lease,  where  the  fair  market  value  of  the  property 
is  materially  disproportionate  to  the  cost,  the  depletion 
allowance  shall  be  based  upon  the  fair  market  value  of  the 
property  at  the  date  of  discovery,  or  within  thirty  days 
thereafter;  such  reasonable  allowance  in  all  the  above 
cases  to  be  made  under  rules  and  regulations  to  be  pre- 
scribed by  the  Commissioner  with  the  approval  of  the 
Secretary.    In  the  case  of  leases  the  deductions  allowed  by 


46  Income  Tax 


this  paragraph  shall  be  equitably  apportioned  between  the 
lessor  and  lessee.* 

188  (10)   In  the  case  of  insurance  companies,   in  addition  to  the 

above:  (a)  The  net  addition  required  by  law  to  be  made 
within  the  taxable  year  to  reserve  funds  (including  in  the 
case  of  assessment  insurance  companies  the  actual  deposit 
of  sums  with  state  or  territorial  officers  pursuant  to  law 
as  additions  to  guarantee  or  reserve  funds) ;  and  (b)  the 
sums  other  than  dividends  paid  within  the  taxable  year  on 
policy  and  annuity  contracts; 

189  (li)   In  the  case  of  corporations  issuing  policies  covering  life, 

health,  and  accident  insurance  combined  in  one  policy 
issued  on  the  weekly  premium  payment  plan  continuing 
for  life  and  not  subject  to  cancellation,  in  addition  to  the 
above,  such  portion  of  the  net  addition  (not  required  by 
law)  made  within  the  taxable  year  to  reserve  funds  as  the 
Commissioner  finds  to  be  required  for  the  protection  of  the 
holders  of  such  policies  only; 

190  (12)   In  the  case  of  mutual  marine  insurance  companies,  there 

shall  be  allowed,  in  addition  to  the  deductions  allowed  in 
paragraphs  (1)  to  (10),  inclusive,  amounts  repaid  to  policy 
holders  on  account  of  premiums  paid  by  them,  and  interest 
paid  upon  such  amounts  between  the  ascertainment  and 
the  payment  thereof ; 

191  (13)   In  the  case  of  mutual  insurance  companies   (other  than 

mutual  life  or  mutual  marine  insurance  companies)  requir- 
ing their  members  to  make  premium  deposits  to  provide 
for  losses  and  expenses,  there  shall  be  allowed,  in  addition 
to  the  deductions  allowed  in  paragraphs  (1)  to  (10),  inclu- 

•It  is  to  be  regretted  that  the  Congress  \vas  not  more  specific  in  its  require- 
ments for  divi#ion  of  property  or  deductions  between  lessor  and  lessee.  The 
dcductiuiis  allowed  by  this  paragraph  (depletion  and  depreciation)  are  a  return 
or  segregation  of  capital  value  from  the  proceeds  of  a  Avell  or  mine  and  the  deduc- 
llon  of  this  capital'value  from  value  realized  from  product,  is  a  measure  of  income. 

To  say  that  this  capital  value  "shall  be  equitably  apportioned  between  the 
lessor  and  lessee"  begs  the  question.  It  would  seem  that  the  person  entitled  to 
(Hpitnl  return,  in  such  a  case,  is  the  owner  of  the  capital.  In  the  matter  of  deple- 
tion, such  owner  is  the  owner  of  the  fee  in  product  before  its  severance  from  the 
real  estate.  There  certainly  should  be  no  division  as  between  him  and  his  lessee. 
If  the  contract  be  one  of  sale  (so  that  in  the  conversion  of  oil  or  ore  into  personal 
property  upon  its  severance  from  the  fee,  and'  upon  such  happening,  the  right  of 
property  in  tlie  personalty  becomes  vested  In  the  lessee),  the  entire  capital  value 
in  such  personal  property  would  seem  to  be  in  the  lessee  as  proprietor  of  the  per- 
sonalty, and  it  is  difficult  to  see  what  fair  division  of  property  there  could  be 
as  between  lessor  and  lessee  in  such  a  ease.  The  capital  of  the  lessee  invested 
in  this  personalty  would  be  what  it  cost  him.  This  would  be  royalty,  plus 
any  other  cost  properly  assignable.  In  this  case  the  lessor  would  properly  have  no 
part. 

Again,  a  lessor  may  be  himself  a  lessee,  in  which  eve»t  there  would  be  a  divi- 
sion of  property  as  between  himself  and  his  lessor  and  again  between  himself  and 
Ills  lessee.  ..  * 

In  the  case  of  depreciation,  the  object  of  which  is  a  recoupment  of  capital 
vfllue  of  physical  property,  lost  through  wear  and  tear  in  use  in  business,  the 
proper  owner  of  such  restored  capital  would  seem  to  be  the  owner  of  the  physical 
property  In  the  first  instance  and  there  would  seem  to  be  nothing  equitable  in 
requiring  a  division  of  this  luopcrty  with  some  other  who  has  no  title  to  it. 


Income  Tax  47 


sive,   (unless  otherwise  allowed  under  such  paragraphs) 

the  amount  of  premium  deposits  returned  to  their  policy 
holders  on  account  of  premiums  paid  by  them,  and  interest 
the  payment  of  losses,  expenses,  and  re-insurance  reserves; 

14)  Special  Loss  on  Inventory  or  Because  of  Rebates:  192 

(a)  193 

(1)  If  it  appears  to  the  taxpayer  at  or  after  the  close 
of  the  taxable  year,  but  before  filing  returns  of 
income,  that  he  has  sustained  a  substantial  loss 
(whether  or  not  actually  realized  by  sale  or  other 
disposition)  resulting  from  any  material  reduction 
(not  due  to  temporary  fluctuation)  of  the  value 
of  the  inventory  for  such  taxable  year,  or 

(2)  That  there  is  a  substantial  loss  resulting  from  the  194 
actual  payment  after  the  close  of  such  taxable 
year,  but  before  filing  return  for  such  taxable 
year,  of  rebates  in  pursuance  of  contracts  entered 
into  during  such  year  upon  sales  made  during 
such  year. 

He  may,  at  the  time  of  filing  returns  for  the  tax-  195 
able  year  of  1918,  file  a  claim  in  abatement  based 
on  the  foregoing  facts.  In  such  case,  payment  of 
the  amount  of  the  tax  covered  by  such  claim  shall 
not  be  required  until  the  claim  is  decided.  If  a 
claim  in  abatement  is  filed,  it  must  be  accompanied 
by  a  bond  in  double  the  amount  of  the  tax  covered 
by  the  claim,  with  sureties  satisfactory  to  the 
Commissioner,  conditioned  for  the  payment  of 
any  part  of  such  tax  found  to  be  due,  with  interest. 
If  any  part  of  such  claim  is  disallowed  then  the 
remainder  of  the  tax  due  shall,  on  notice  and 
demand  by  the  collector,  be  paid  by  the  taxpayer 
with  interest  at  the  rate  of  1%  per  month  from  the 
time  the  tax  would  have  be6n  due  had  no  such 
claim  been  filed.  Upon  a  showing  satisfactory  to 
the  Commissioner  that  such  substantial  loss  has 
been  sustained,  the  amount  thereof  shall  be  de- 
ducted from  the  net  income  and  the  Income  Tax 
^  and  War  Excess   Profits   Tax  shall   be  computed 

accordingly,  and  the  bond  shall  become  null  and 
void. 

(b)  196 

If  no  claim  in  abatement  is  filed  and  the  tax  is 
computed  and  paid  without  regard  to  such  loss 
it  is  thereafter  shown  to  the  satisfaction  of  the 
Commissioner  that  during  the  taxable  year  1919 


48  Income  Tax 


a  substantial  loss  of  the  character  above  de- 
scribed has  been  sustained  by  the  taxpayer,  then 
the  amount  of  such  loss  shall  be  deducted  from  the 
net  income  for  the  taxable  year  1918  and  the 
Income  Tax  and  War  Excess  Profits  Tax  for  1918 
shall  be  redetermined  accordingly. 

197  Any  amount  found  to  be  due  to 'the  taxpayer  upon 
the  basis  of  such  determination  shall  be  credited 
or  refunded  to  the  taxpayer  in  accordance  with  the 
provisions  of  Section  252.  In  order  to  receive  this 
consideration,  however,  the  taxpayer  must,  within 
five  years  from  the  date  when  the  return  under 
consideration  was  due,  file  a  claim  for  refund. 

Deductions  Allowed  to  Foreign  Corporations: 

(See  par.  174  for  income  of  a  foreign  corporation.) 

198  Except  as  to  interest  and  taxes  (which  shall  be  allowed  as  pro- 
vided for  in  items  (2)  and  (3)  (pars.  175,  176),  the  deductions  as 
provided  for  a  domestic  corporation  shall  be  allowed  a  foreign 
corporation  only  if  and  to  the  extent  that  said  deductions  are 
connected  with  income  arising  from  a  source  within  the  United 
States;  and  the  proper  apportionment  and  allocation  of  the 
deductions  with  respect  to  sources  of  income  within  and  with- 
out the  United  States  shall  be  determined  under  rules  and  regu- 
lations prescribed  by  the  Commissioner  with  the  approval  of  the 
Secretary. 

Items  Not  Deductible: 

199  There  shall  be  no  allowance  as  a  deduction  for  any  item  specified 
as  not  allowed  by  Section  215  for  individuals  (see  par.  158). 

Credits  Allowed  Against  Income: 

For  the  purpose  only  of  the  Income  Tax  there  shall  be  allowed 
the  following  credits  against  net  income: 

200  (a)   The  amount  received  as  interest  upon  obligations  of  the 

United  States  and  bonds  issued  by  the  War  Finance  Cor- 
poration, which  is  included  in  gross  income: 

201  (b)   The  amount  of  any  War  Excess  Profits  Taxes  imposed  for 

the  same  taxable  year;  Provided,  that  in  the  case  of  a 
corporation  which  makes  return  for  a  fiscal  year  begin- 
ning in  1917  and  ending  in  1918,  in  computing  the  tax  as 
provided  in  Section  205  (a)  the  Excess  Profits  Tax  com- 
puted for  the  entire  period  under  the  Revenue  Act  of 
1917  shall  be  credited  against  the  net  income  computed 
for  the  entire  period  for  Income  Tax  under  the  Revenue 
Act  of  1916,  as  amended  by  the  Revenue  Act  of  1917  and 
as  computed  for  Income  Tax  under  the  Revenue  Act  of 
1917,  and  the  War  Excess  Profits  Tax  computed  for  the 


Income  Tax  49 


entire  period  at  the  rates  prescribed  for  the  calendar  year 
1918  shall  be  credited  against  the  net  income  computed 
for  Income  Tax  for  the  entire  period  under  the  Revenue 
Act  of  1918. 

(c)  In  the  case  of  a  domestic  corporation,  $2,000.  202 

Credit  Against  Tax: 

(a)  In  the  case  of  a  domestic  corporation  the  total  tax  so  203 
imposed  for  the  taxable  year  for  Income  and  War  Excess 
Profits  Taxes,  shall  be  credited  with  the  amount  of  any 
income,  war  profits  and  excess  profits  taxes  paid  during 

the  taxable  year  to  any  foreign  country,  upon  income 
derived  from  sources  therein,  or  to  any  possession  of  the 
United  States. 

If  accrued  taxes  when  paid  differ  from  the  amount  204 
claimed  as  credits  by  the  corporation,  or  if  any  tax  paid  is 
refunded  in  whole  or  in  part,  the  corporation  shall  at 
once  notify  the  commissioner,  who  shall  redetermine  the 
amount  of  the  Income  and  Excess  Profits  Taxes  due  for 
the  year  or  years  affected  and  the  amount  of  the  taxes 
due  upon  such  redetermination,  if  any,  shall  be  paid  by 
the  corporation  upon  notice  and  demand  by  the  collector, 
or  the  amount  of  taxes  overpaid,'if  any,  shall  be  credited 
or  refunded  to  the  corporation  in  accordance  with  the 
provisions  of  Section  252.  In  the  case  of  such  a  tax 
accrued  but  not  paid,  the  commissioner  as  a  condition 
precedent  to  the  allowance  of  this  credit  may  require  the 
corporation  to  give  a  bond  with  sureties  satisfactory  to 
and  to  be  approved  by  him  in  such  penal  sum  as  he  may 
require,  conditioned  for  the  payment  by  the  taxpayer  of 
any  amount  of  taxes  found  due  upon  any  such  redeter- 
mination; and  the  bond  herein  prescribed  shall  contain 
such  further  conditions  as  the  Commissioner  may  require. 

(b)  This  credit  shall  be  allowed  only  if  the  taxpayer  fur-  205 
nishes  evidence  satisfactory  to  the  Commissioner  showing 

the  amount  of  income  derived  from  sources  within  such 
foreign  country  or  such  possession  of  the  United  States, 
as  the  case  may  be,  and  all  information  necessary  for  the 
computation  of  such  credit. 

(c)  If  a  domestic  corporation  makes  a  return  for  a  fiscal  year  206 
beginning  in  1917  and  ending  in  1918,  only  that  propor- 
tion of  this  credit  shall  be  allowed  which  the  part  of 
such  period  within  the  calendar  year  1918  bears  to  the 
entire  period. 

Corporation  Returns: 

Every    corporation    subject   to   Income    Tax    and    every    Personal  207 
Service   Corporation   shall  make  a  return,   stating  specifically  the 


50  Income  Tax 


items  of  its  gross  income  and  the  deductions  and  credits  allowed  by 
the  statute.  The  return  shall  be  sworn  to  by  the  president,  vice- 
president  or  other  principal  officer  and  by  the  treasurer  or  assistant 
treasurer.  If  any  foreign  corporation  has  no  office  or  place  of  busi- 
ness in  the  United  States,  but  has  an  agent  in  the  United  States,  the 
return  shall  be  made  by  the  agent.  In  cases  where  receivers,  trus- 
tees in  bankruptcy,  or  assignees,  are  operating  the  property  or  busi- 
ness of  corporations,  such  receivers,  trustees,  or  assignees  shall 
make  returns  for  such  corporations  in  the  same  manner  and  form 
as  corporations  are  required  to  make  returns.  Any  tax  due  on  the 
basis  of  such  returns  made'by  receivers,  trustees,  or  assignees  shall 
be  collected  in  the  same  manner  as  if  collected  from  the  corpora- 
tions of  whose  business  or  property  they  have  custody  and  control. 
Corporation  returns  shall  be  subject  to  the  provisions  of  Section  226 
— change  of  accounting  period,  and  of  Section  228  providing  for  the 
correction  of  understatement  of  income  in  returns.  When  there  is 
a  change  in  the  accounting  period  as  provided  for  in  Section  226,  the 
credit  of  $2,000  allowed  corporations  shall  be  reduced  to  an  amount, 
for  each  return,  which  bears  the  same  ratio  to  the  full  credit  as  the 
number  of  months  in  the  period  for  which  such  return  is  made  bears 
to  twelve  months. 

208  Consolidated  Returns: 

(a)  Are  requirecf  to  be  made  by  affiliated  corporations  for 
income  and  invested  capital  and  Income  Tax  and  War 
Excess  Profits  Tax  shall  be  computed  and  determined 
under  such  return; 

Provided,  that  there  shall  be  taken  out  of  such  consoli- 
dated net  income  and  invested  capital,  the  net  income  and 
invested  capital  of  any  such  affiliated  corporation  organ- 
ized after  August  1,  1914,  and  not  successor  to  a  then 
existing  business,  50  per  centum  or  more  of  whose  gross 
income  consists  of  gains,  profits,  commissions,  or  other 
income,  derived  from  a  Government  contract  or  contracts 
made  between  April  6,  1917,  ami  November  11,  1918,  both 
dates  inclusive.  In  such  case  the  corporation  so  taken 
out  shall  be  separately  assessed  on  the  basis  of  its  own 
•  invested  capital  and  net  income  and  the  remainder  of 
such  affiliated  group  shall  be  assessed  on  the  basis  of 
the  remaining  consolidated  invested  capital  and  net 
income. 

209  In  any  case  in  which  a  tax  Is  assessed  upon  the  basis  of 
a  consolidated  return,  the  total  tax  shall  be  computed  in 
the  first  instance  as  a  unit  and  shall  then  be  assessed 

_  upon  the  respective  affiliated  corporations  in  such  pro- 

portions as  may  be  agreed  upon  among  them,  or,  in  the 
absence  of  any  such  agreement,  then  on  the  basis  of  the 
net  income  properly  assignable  to  each.  There  shall  be 
allowed  in  computing  the  income  tax  only  one  specific 


Income  Tax  51 


credit  of  $2,000  (as  provided  in  Section  236)  ;  in  com- 
puting the  war-profits  credit  (as  provided  in  Section  311) 
only  one  specific  exemption  of  $3,000;  and  in  computing 
the  excess-profits  credit  (as  provided  in  Section  312)  only 
one  specific  exemption  of  $3,000. 

(b)  For  the  purpose  of  this  section  two  or  more  domestic  210 
corporations  shall  be  deemed  to  be  aflfiliated — 

(1)  If  one  corporation  owns  directly  or  controls  through 
closely  aflfiliated  interests  or  by  a  nominee  or  nomi- 
nees substantially  all  the  stock  of  the  other  or 
others,  or, 

(2)  If  substantially  all  the  stock  of  two  or  more  corpo- 
rations is  owned  or  controlled  by  the  same  interests. 

(c)  For  the  purposes  of  Section  238  (credit  for  tax)  a  211 
domestic  corporation  which  owns  a  majority  of  the  voting 
stock  of  a  foreign  corporation  shall  be  deemed  to  have 
paid  the  same  proportion  of  any  income,  war-profits  and 
excess-profits  taxes  paid  (but  not  including  taxes  ac- 
crued) by  such  foreign  corporation  during  the  taxable 
year  to  any  foreign  country  or  to  any  possession  of  the 
United  States  upon  income  derived  from  sources  without 

the  United  States,  which  the  amount  of  any  dividends 
(not  deductible  under  Section  234)  received  by  such 
domestic  corporation  from  such  foreign  corporation  dur- 
ing the  taxable  year  bears  to  the  total  taxable  income  of 
such  foreign  corporation  upon  or  with  respect  to  which 
such  taxes  were  paid: 

Provided,  that  in  no  such  case  shall  the  amount  of  the 
credit  for  such  taxes  exceed  the  amount  of  such  divi- 
dends (not  deductible  under  Section  234)  re(%eived  by 
such  domestic  corporation  during  the  taxable  year.  • 

Payment  of  Tax  at  the  Source: 

Source  is  the  place  where  income  originates.  212 

The  payment  referred  to  is  payment  of  tax  assessable  on  income  213 
of  the  taxpayer. 

A  taxpayer  discharges  part  of  his  tax  obligation  in  this  way,  214 
so  that  in  fact,  the  operation  is  "collection,"  by  the  Government, 
of  tax  at  the  ^*source"  of  such  income.  The  collection  is  made  by  re- 
quiring the  source  to  deduct  and  withhold  from  gains,  profits  and 
income  (payable  by  the  source  to  the  taxpayer)  a  percentage  thereof 
and  turn  the  same  over  to  the  Government  on  account  of  tax  assess- 
able on  income  of  the  taxpayer. 

Withholding  is  to  be  made  in  respect  of  the  Normal  Income  Tax  215 
only.     The  subjects  of  withholding  are — 

(a)  Nonresident   alien   individuals    (and   partnerships   as   to  2I6 
tax-covenant  bond  interest)  for  all  income  from  sources 
in  the  United  States  subject  to  the  Normal  Tax; 


52  Income  Tax 


217  (b)   Foreign  corporations  whose  income  from  sources  in  the 

United  States  is  subject  to  Income  Tax  and  which  corpo- 
rations are  not  engaged  in  trade  or  business  within  the 
United  States  and  do  not  have  an  office  or  place  of  busi- 
ness in  the  United  States; 

218  (c)   An  individual  citizen  or  resident  of  the  United  States  or 

domestic  partnership,  as  to  tax-covenant  bond  interest 
only.  These  last  may  claim  exemption  from  withholding, 
though  it  is  usually  to  their  interest  to  have  withholding 
made  from  this  class  of  income. 

219  There  is  no  withholding  for  tax  on  account  of  domestic  corpora- 
tions. 

220  The  rate  of  Normal  Tax  on  net  income  of  nonresident  aliens, 
whether  individuals  or  corporations,  is  12%  for  1918  and  8%  there- 
after for  the  individuals  and  10%  for  the  corporations. 

221  The  percentage  required  to  be  deducted  and  withheld  is  8% 
for  such  individuals  and  10%;  for  such  corporations,  of  all  net  in- 
come from  sources  within  the  United  States  of  such  nonresident  alien 
individuals  or  corporations  subject  to  Normal  Income  Tax,  except 
interest  on  bonds  having  a  tax-covenant,  and  as  to  this  tax-covenant 
bond  interest,  the  percentage  thereof  to  be  withheld  is  2%  only, 
regardless  of  whether  the  owner  of  such  income  is  a  nonresi- 
dent alien  (individual,  partnership  or  corporation)  or  citizen  or 
resident  of  the  United  States  (individual  or  partnership)/  The 
effect  of  this  is  that  for  1918  tax,  for  all  income  other  than  tax- 
covenant  bond  interest  payable  to  a  nonresident  alien  individual  or 
corporation,  as  herein  specified,  there  will  be  withheld  therefrom 
8<^;,  thereof  for  nonresident  alien  individuals  and  10%  therefrom 

•  for  nonresident  alien  corporations,  leaving  to  be  paid  on  return  made 
by  or  for  the  nojiresident  alien  individual  4%  and  for  the  nonresident 
alien  corporation  2%,  and  for  tax-covenant  bond  interest  to  whom- 
soever payable,  there  will  be  withheld  therefrom  2%  thereof,  leaving 
to  be  paid  on  return  made  by  or  for  the  taxpayer  10%  for  1918.  For 
years  subsequent  to  1918,  the  entire  tax  will  be  withheld  on  such 
income  other  than  tax-covenant  bond  interest  payable  to  a  non- 
resident alien.  And  2%  only  will  continue  to  be  withheld  from  tax- 
covenant  bond  interest,  leaving  6%  to  be  paid  on  return  made  by  or 
for  the  individual  taxpayer  and  8%  for  the  foreign  corporation,  and 
whether  the  individual  is  a  nonresident  alien,  or  citizen  or  resident 
of  the  United  States. 

222  The  only  cases  of  nonresident  alien  income  from  sources  in 
the  United  States  subject  to  the  Normal  Income  Tax  which  will  not 
be  taxable  on  the  full  amount  of  such  income  are  those  cases  (to 
be  provided  for  by  regulations  in  the  discretion  of  the  Commis- 
sioner, under  Section  216  (e)  and  Section  217)  in  which  the  personal 
exemption  of  $1,000  or  $2,000,  as  the  case  may  be,  and  the  exemption 


Income  Tax 


53 


224 


on  account  of  dependents  of  $200  each  (as  provided  by  Section  216) 
(c  and  d)  are  granted  as  reciprocation  on  the  part  of  the  United 
States  because  its  citizens  (having  income  from  sources  within  but 
not  resident  in  the  country  of  which  the  nonresident  alien  individual 
receiving  United  States  exemptions,  is  a  citizen  or  subject  and  which 
country  imposes  an  income  tax)  are  granted  a  similar  exemption  or 
credit  by  such  foreign  country.  The  burden  of  proof  will  be  on  the 
nonresident  alien  to  make  a  showing  which  will  give  him  the  advan- 
tage of  such  a  regulation. 

The  persons  who  are  to  make  the  deduction  and  withholding  are:   223 

All  individuals,  corporations  and  partnerships,  in  whatever  ca- 
pacity acting,  who  have  the  control,  receipt,  custody,  disposal 
or  payment  of — 

r Interest 
Rent 

Salaries        / 
Wages 

Premiums 
Annuities 

Compensations 
Remunerations 
Emoluments 
or  other  fixed  or  determinable  annual  or 
periodical  gaini;,  profits  and  income 
(other  than  income  received  as  divi- 
dends from  a  corporation  whose  income 
is  subject  to  Income  Tax)  of  any  non- 
resident alien  individual  or  nonresident 
alien  corporation  not  engaged  in  trade 
or  business  in  the  United  States  and  not 
having  an  office  or  place  of  business 
therein.     And — 

Interest  on  bonds,  mortgages,  or  deeds 
of  trust,  or  other  similar  obligations  of 
a  corporation  which  contain  a  contract 
or  provision  by  which  the  obligor 

(a)  Agrees  to  pay  any  portion  of  the 
tax  imposed  upon  the  obligee  by 
the  Income  Tax  law,  or 

(b)  To  reimburse  the  obligee  for  any 
portion  of  the  tax,  or 

(c)  To  pay  the  interest  without  de- 
duction for  any  tax  which  the 
obligor  may  be  required  or  per- 
mitted— 

(1)  To  pay  thereon,  or 

(2)  to  retain  therefrom 
under  any  law  of  the  United  States. 


Income  from  which  withholding 
•  is    to    be    made    at   the    rate    of , 
8%  for  individuals  and  10%  foi 
foreign   corporations. 


Income  from  which  withholding 
is  to  be  made  at  the  rate  of  2% 
only. 


225 


64  INOCME  Tax 


226  And  this  2%  on  account'  of  tax  on  income  of  the  owner  of 
such  interest  is  to  be  withheld  regardless  of  whether  such  income 
is  payable  annually  or  at  shorter  or  longer  periods  and  whether 
payable  to  a  nonresident  alien  individual  or  to  an  individual  citizen 
or  resident  of  the  United  States  or  to  a  partnership  or  to  a  foreign 
corporation  not  engaged  in  business  or  trade  in  the  United  States 
and  not  having  an  office  or  place  of  business  therein.  Such  with- 
holding, however,  shall  not  be  made  in  the  case  of  a  resident  or 
citizen  of  the  United  States  if,  on  or  before  February  first  next 
preceding  the  date  on  which  the  return  of  income  on  a  calendar 
year  basis  is  to  be  made,  such  citizen  or  resident  shall  file  with  the 
withholding  agent  a  signed  notice  in  writing  claiming  the  benefit  of 
the  personal  exemption  and  credit  for  dependents  granted  by  law, 
and  likewise,  in  the  case  of  a  nonresident  alien  individual  who  comes 
within  the  provisions  of  regulations  (under  Section  217)  provided 
by  the  Commissioner  for  claiming  such  exemptions  and  credits. 

227  Under  the  Act  of  October  3,  1913,  and  likewise  under  the  Act 
of  September  8,  1916  (both  of  which  provided  for  withholding  of 
Income  Tax  from  all  individual  income  subject  to  the  Normal  Tax 
and  which  should  be  in  excess  of  the  personal  exemptions  provided 
by  law  and  claimed  by  the  taxpayer),  there  were  ownership  certifi- 
cates to  be  issued  in  collecting  bond  interest  and  on  which  certificates 
there  was  a  provision  for  claiming  exemption  from  withholding,  and 
there  was  an  additional^rertificate  for  claiming  exemption  from  with- 
holding on  income  subject  to  the  Normal  Tax,  other  than  bond  in- 
terest. The  Act  of  October  3,  1917,  substituted  "information  at  the 
source"  for  "withholding  at  the  source"  in  all  cases  except  in  the 
case  of  citizens  and  aliens  resident  in  the  United  States,  for  interest 
on  bonds  having  a  tax-covenant,  while  the  income  of  nonresident 
aliens  remained  subject  to  withholding  as  before  and  the  nonresi- 
dent alien  had  no  exemptions.  The  provisions  of  the  Act  of  1917 
with  respect  to  withholding  are  continued  in  the  present  law. 

228  Tax-covenant  bond  interest  owned  by  citizens  and  resident 
aliens  being  the  only  income  in  respect  of  which  an  exemption  from 
withholding  under  the  Act  of  1917  could  be  claimed  and  this  claim 
not  being  limited  in  any  way  to  the  amount  of  personal  exemption 
granted  by  law,  ownership  certificate  form  1,000  (printed  in  black 
ink  on  white  paper)  was  provided  as  the  means  of  notifying  debtor 
corporations  that  the  owner  of  the  income  elected  not  to  claim  exemp- 
tion and  so  withholding  was  to  be  made.  All  other  bond  interest 
owned  by  citizens  and  resident  aliens  not  being  subject  to  with- 
holding, an  ownership  certificate,  form  1001  (printed  in  black  ink  on 
yellow  paper)  was  provided.  The  effect  of  using  a  yellow  certificate 
with  coupons  from  bonds  having  a  tax-covenant  was  a  notification 
from  the  owner  of  such  income  to  the  debtor  corporation  that  the 
owner  elected  to  claim  exemption  from  withholding.  In  which  event, 
the  debtor  corporation  was  relieved  from  withholding  and  the  tax- 
payer assumed  his  tax  obligation   in  full  in   respect  of  his  tax- 


Income  Tax  55 


covenant  bond  interest  and  consequently  released  the  debtor  cor- 
poration from  the  obligation  of  reimbursement  under  its  tax-cove- 
nant in  the  bond.  Inasmuch  as  nonresident  aliens  had  no  exemption 
which  could  be  claimed,  he  or  it  w^as  required  to  use  a  white  certifi- 
cate with  respect  to  all  bond  interest. 

Owners  of  Tax  Covenant  Bonds  Not  Known  to  the  Withholding 
Agent : 

The  Commissioner  of  Internal  Revenue  may  authorize  the  deduc-  229 
tion  or  withholding  of  tax  at  the  rate  of  2%   from  tax-covenant 
bonds,  the  owners  of  which  or  of  the  interest  coupons  therefrom,  are 
unknown  to  the  debtor  corporation  or  its  withholding  agent. 

Withholding  Returns: 

Every  individual,  corporation  or  partnership  required  to  deduct  230 
and  withhold  any  tax  as  herein  provided  must  make  a  return 
thereof  on  or  before  March  First  each  year  and  shall  on  or  before 
June  Fifteenth  then  next  following,  pay  the  tax  (so'  collected  for  the 
Government  by  such  deduction  and  withholding)  to  the  official  of 
the  United  States  Government  authorized  to  receive  it.  Every  with- 
holding agent  is  made  liable  for  such  tax  and  is  indemnified  against 
the  claims  of  all  persons  for  the  amount  of  any  payments  made  in 
accordance  with  the  provisions  of  law  for  withholding. 

Income   from   which   withholding   is   made  must  be   included   in  231 
full  in  the  return  of  income  of  the  recipient  of  such  income,  but  the 
amount  of  tax  so  withheld  shall  be  credited  against  the  amount  of 
Income  Tax  as  computed  in  such  return. 

If  any  tax  required  to  be  deducted  and  withheld  is  paid  by  the  232 
recipient  of  the  income,  the  tax  shall  not  again  be  recollected  from 
the  withholding  agent  and  no  penalty  shall  attach  for  failure  to 
return  or  pay  said  tax  by  the  withholding  agent,  unless  such  failure 
was  fraudulent  ajid  for  the  purpose  of  evading  payment. 

Payment  of  Taxes. 

Except  tax   withheld   at   the   source,   which   is  to   be   paid   over  233 
on  or  before  June  Fifteenth  each  year  to  the  proper  official  of  the 
Government  authorized  to  receive  it,  the  tax  shall  be  paid:  ALL  at 
the  time  of  filing  return  or  in  four  instalments,  each  consisting  of 
one-quarter  of  the  total  amount  of  the  tax :  If  on  Basis  of 

Calendar  Year 


The  1st  instalment  shall  be  paid  at  the  time 

fixed  by  law  for  filing  the  return  ....    March  15th 

The  2nd  instalment  shall  be  paid  on  the  15th 
day  of  the  third  month  thereafter     .     .     . 

The  3rd  instalment  shall  be  paid  on  the  15th 
day  of  the  sixth  month  thereafter     .     .     . 

The  4th  instalment  shall  be  paid  on  the  15th 
day  of  the  ninth  month  thereafter     .     . 


June  15th 
September  15th 
December  15th 


56 


Income  Tax 


234 


Where  an  extension  of  time  for  filing  the  return  is  granted, 
the  time  for  payment  of  the  first  instalment  shall  be  postponed  until 
the  expiration  of  the  period  of  extension  only,  other  instalments  must 
be  paid  within  the  required  time  unless  the  Commissioner  provides 
difi'erently  in  granting  the  extension.  In  any  case,  where  the  pay- 
ment of  the  instalment  is  extended  at  the  request  of  the  taxpayer, 
there  shall  be  added  to  such  instalment  as  interest  thereon  Vz  of  1% 
from  the  time  it  would  have  been  due,  if  there  had  been  no  exten- 
sion, until,  paid.  If  any  instalment  is  not  paid  when  due,  the  entire 
amount  of  tax  then  unpaid  shall  become  due  and  payable  upon 
notice  and  demand  by  the  collector. 


235 


Penalties: 

For  understatement  of  income 
in  a  return,  due  to  negligence  on 
the  part  of  the  taxpayer,  but 
without  intent  to  defraud — 


If  the  understatement  is  false 
or    fraudulent    with    intent    to 
evade  the  tax,  the  penalty  shall" 
be— 


237       For    failure    to    pay    tax    in 
time — 


236 


5%  of  the  total  amount  of  the 
deficiency  plus  interest  at  the 
rate  of  1%  per  month  on  the 
amount  of  the  deficiency  of  each 
instalment  from  the  time  the  in- 
stalment was  due. 

50%  of  the  amount  of  the  de- 
ficiency and  the  taxpayer  shall 
be  deemed  guilty  of  a  misde- 
meanor and  subject  to  further 
penalty  of  a  fine  of  not  more 
than  $10,000,  or  imprisonment 
for  not  more  than  one  year,  or 
both,  with  the  cost  of  prosecu- 
tion. 

5%  of  the  amount  due  but  not 
paid,  plus  1%  per  month  upon 
such  amount  from  the  time  it 
became  due. 


238  Where,  however,  any  amount 
of  tax  otherwise  due  and  pay- 
able is  held  over  because  of  a 
pending  claim  for  abatement 
and  which  claim  is  disallowed, 
the  only  penalty  shall  be — 

239  Whenever  the  issuance  of  a 
warrant  for  distraint  for  collec- 
tion of  tax  becomes  necessary, 
there  shall  be  added  as  a  part  of 
the  tax — 

In  addition  to  the  above: 

240  For  failure  to  make  return, 
pay  or  collect  tax,  or  supply  in- 
formation at  the  time  or  times 
required — 


Interest  at  the  rate  of  V2  of  1% 
per  month  from  the  time  the 
amount  was  due  until  the  claim 
is  decided. 


The  sum  of  $5.00. 


Penalty  $1,000,  plus  an  addi- 
tion to  the  tax  of  25%  thereof. 


Income  Tax  57 


!       $10,000,    or    imprisonment    for 
If  the  failure  is  wilful,  penalty  i  not  more  than  one  year,  or  both,  241 


is- 


with  costs  of  prosecution  plus  an 
addition  to  the  tax  of  50%. 


Information  at  the  Source: 

When    requested    by   the    Commissioner,    corporations    shall    file  242 
information  and  particulars  as  to  the  payment  of  dividends; 

Brokers,  as  to  the  business  transacted  for  and  with  customers,  243 
giving  the  particulars  called  for. 

In  all  other  cases,  except  payment  of  interest  on  obligations  244 
of  the  United  States,  all  individuals,  corporations  and  partnerships, 
in  whatever  capacity  acting,  making  payment  of  income  to  another 
in  any  taxable  year  of  $1,000  or  more,  shall  make  a  return  of  infor- 
mation as  required,  setting  forth  the  amount  and  name  and  address 
of  the  recipient  of  such  payment. 

Such   payments   may   be   required   regardless   of   amount   in   the  245 
case  of  payment  of  interest  on  bonds,  mortgages,  deeds  of  trust  or 
other  similar  obligations  of  corporations  and  for  foreign  items. 

FOREIGN  ITEMS 

Income  represented  by  Coupons,  Checks  or  Bills  of  Exchange,  246 
in  respect  of  foreign  payments  of  interest  or  dividends,  is  subject 
to  both  the  Normal  and  Surtax  for  individuals  and  to  the  Normal 
Tax  and  Excess  Profits  Tax  to  corporations,  but  is  not  subject  to 
withholding.  (An  exception  is  made  by  T.  D.  2759  of  the  case  of 
a  foreign  corporation  having  a  paying  agent  in  the  United  States 
and  issuing  bonds  which  have  a  tax-free-covenant  clause.  In  such 
a  case,  it  was  provided  that  if  the  owner  of  the  income  desired  with- 
holding at  the  source,  he  might  use  form  1000  properly  modified  to 
show  that  the  debtor  has  a  paying  agent  in  this  country,  otherwise 
form  1001-A  would  be  used.)*  The  first  collecting  agent  in  the  United 
States  (whether  individuals,  corporations  or  partnerships)  under- 
taking as  a  matter  of  business  or  for  profit  the  collection  of  such 
foreign  payments,  is  required  to  obtain  a  license  therefor  and  be 
subject  to  regulations  enabling  the  Government  to  obtain  the  infor- 
mation requisite  for  the  purposes  of  the  tax  on  such  income,  under 
penalty  for  violation  of  such  regulations,  of  being  guilty  of  a  mxis- 
demeanor  and  subject  to  a  fine  of  not  more  than  $5,000,  or  imprison- 
ment for  not  more  than  one  year,  or  both.  The  ownership  certificate 
provided  to  be  used  by  citizens  and  resident  aliens  in  connection 


•Logically,  this  must  refer  to  a  case  where  the  tax-covenant  in  the  foreign 
obligation  is  in  respect  of  a  tax  levied  "under  some  law  of  the  United  States." 
Sometimes  bondS  of  foreign  governments  and  foreign  corporations  contain  tax- 
covenants  but  only  in  respect  of  tax  levied  by  such  foreign  government  or  govern- 
ments to  which  the  foreign  corporation  bears  allegiance.  Obviously  this  would  not 
apply,  because  both  Sec.  9  (c),  Act  October  3.  1917,  and  Sec.  221  (b)  of  the 
Revenue  Act  of  1918,  limit  the  obligation  in  respect  of  tax-covenant  contracts  in 
bonds,  to  a  tax  levied  ''under  any  law  of  the  United  States." 


58  Income  Tax 


with  collection  of  such  income  is  form  1001-A.  Where  such  income 
is  payable  to  a  nonresident  alien  through  an  agency  in  the  United 
States,  the  certificate  to  be  used  is  form  1071  (printed  in  black  ink 
on  yellow  paper). 

247  These  are  the  regulations  under  the  Revenue  Act  of  1917,  and 
as  the  present  law  is  the  same  it  is  assumed  the  regulations  in  this 
respect  will  be  the  same  for  the  purpose  of  the  present  law. 

Possessions  of  the  United  States: 

Porto  Rico 

Philippine  Islands 

Guam 

Tutuila 

Samoa 

Virgin  Islands. 

248  The  Income  Tax  Law  in  effect  in  Porto  Rico  and  the  Philippine 
Islands  is  the  Act  of  1916  as  amended. 

249  A  tax  imposed  in  Porto  Rico  or  the  Philippine  Islands  shall 
not  be  taken  as  a  credit  against  tax  in  a  return  of  income  to  the 
United  States,  nor  shall  a  dividend  paid  by  a  Porto  Rico  or  Philip- 
pine Islands  corporation  be  taken  by  a  corporation  as  a  deduction 
for  dividends  received,  in  accordance  with  item  6,  Section  234-A.* 

250  So  far  as  citizens  of  these  possessions,  and  who  are  not  other- 
wise citizens  of  the  United  States,  are  concerned,  they  shall  be 
taxed  in  the  United  States  only  on  income  received  from  sources  in 
the  United  States,  technically  speaking,  for  the  purpose  of  Income 
Tax  and  such  income  shall  be  taxed  as  for  a  nonresident  alien. 

Corporations  the  Income  from  Which  Is  Exempt  from  Income  Tax 
and  War-Excess  Profits  Tax  Because  Such  Corporations  Are 
Themselves  Exempt  from  Tax: 

251  (1)  Labor,  agricultural  or  horticultural  organizations; 

252  (2)   Mutual   savings   banks   not  having  a   capital   stock   repre- 

sented by  shares; 

253  (3)   Fraternal  beneficiary  societies,  orders  or  associations. 

(a)  Operating  under  the  lodge  system  or  for  the  exclu- 
clusive  benefit  of  the  members  of  a  fraternity  itself 
operating  under  the  lodge  system,  and 

(b)  Providing  for  the  payment  of  life,  sick,  accident  or 
other  benefits  to  the  members  of  such  society,  order, 
or  association  or  their  dependents; 

254  (4)  Domestic  building  and  loan  associations  and  co-operative 

banks   without   capital    stock   organized   and   operated   for 
mutual  purposes  and  without  profit; 

*ThlH  meaiiH  that  «ufh  Inconu)  received  bv  a  Unitt-d  States  corporation  is  subject 
to  both  the  normal  Income  tax  and  to  the  War-Elxceas  Profits  Tax  to  the  receiving 
corporation. 


Income  Tax  69 


(5).  Cemetery   companies   owned   and   operated   exclusively   for  255 
the  benefit  of  their  members ; 

(6)  Corporations    organized    and   operated   exclusively    for   re-  256 
ligious,   charitable,   scientific   or   educational   purposes,   or 

for  the  prevention  of  cruelty  to  children  or  animals,  no 

part  of  the  net  earnings  of  vi^hich  inures  to  the  benefit  of 
any  private  stockholder  or  individual; 

(7)  Business    leagues,    chambers    of    commerce,    or    boards    of  257 
trade,  not  organized  for  profit  and  no  part  of  the  net  earn- 
ings of  which  inures  to  the  benefit  of  any  private  stock- 
holder or  individual; 

(8)  Civic  leagues  or  organizations  not  organized  for  profit  but  258 
operated  exclusively  for  the  promotion  of  social  welfare ; 

(9)  Clubs  organized  and  operated  exclusively  for  pleasure,  rec-  359 
reation,  and  other  nonprofitable  purposes,  no  part  of  the 

net  earnings  of  which  inures  to  the  benefit  of  any  private 
stockholder  or  member; 

(10)  Farmers  or  other  mutual   hail,  cyclone,   or  fire  insurance   260 
companies,  mutual   ditch   or  irrigation   companies,   mutual 

or  co-operative  telephone  companies,  or  like  organizations 
of  a  purely  local  character,  the  income  of  which  consists 
solely  of  assessments,  dues  and  fees  collected  from  meiji- 
bers  for  the  sole  purpose  of  meeting  expenses; 

(11)  Farmers',    fruit    growers',    or    like    associations,    organized   261 
and  operated  as  sales  agents  for  the  purpose  of  marketing 

the  products  of  members  and  turning  back  to  them  the 
proceeds  of  sales,  less  the  necessary  selling  expenses,  on 
the  basis  of  the  quantity  of  produce  furnished  by  them; 

(12)  Corporations  organized  for  the  exclusive  purpose  of  hold-  262 
ing  title  to  property,  collecting  income  therefrom;  and  turn- 
ing over  the  entire  amount  thereof,   less  expenses,  to  an 
organization  which  itself  is  exempt  from  the  tax  imposed  by 
this  title; 

(13)  Federal    land   banks    and   national   farm  loan    associations  263 
as   provided   in   Section   26  of  the  Act  approved   July   17, 
1916,  entitled— 

"An  Act  to  provide  capital- for  agricultural  development, 
to  create  standard  forms  of  investment  based  upon  farm 
mortgages,  to  equalize  rates  of  interest  upon  farm  loans, 
to  furnish  a  market  for  United  States  bonds,  to  create 
Government  depositories  and  financial  agents  for  the  United 
States,  and  for  other  purposes." 

(14)  Personal  Service  Corporations.  264 


60  War-Excess  Profits  Tax 


PART  II 

THE  WAR-EXCESS  PROFITS  TAX 

265  Corporations  whose  income  is  exempt  from  Income*  Tax  will 
not  be  required  to  make  return  for  the  Excess  Profits  Tax,  and  cor- 
porations whose  net  income  for  the  taxable  year  is  less  than  $3,000 
will  be  exempt  from  the  Excess  Profits  Tax. 

20$  All  other  corporations  having  a  net  income  of  $3,000  or  over, 
as  shown  by  the  Income  Tax  return  (Form  1031),  will  be  required  to 
make  an  Excess  Profits  Tax  return  (Form  1103)  for  the  purpose  of 
calculation  of  the  War-Excess  Profits  Tax. 

287  In  the.  case  of  any  corporation  engaged  in  mining  gold,  the 
portion  of  the  net  income  derived  from  gold  mining  shall  be  exempt 
from  Excess  Profits  Tax  and  the  tax  on  the  remaining  portion  of  the 
net  income  shall  be  the  proportion  of  a  tax  computed  without  the 
benefit  of  this  exception  which  such  remaining  portion  of  the  net 
income  bears  to  the  entire  net  income.  It  will,  therefore,  be  neces- 
sary for  such  corporation  to  make  an  Excess  Profits  Tax  return  if 
its  "other"  net  income  is  $3,000  or  over. 

23g  The  Excess  Profits  Tax  is  a  tax  at  graduated  rates  on  the 
difference  between  the  total  net  income  (excluding  dividends  and 
exempt  income)  and  Excess  Profits  Tax  credit. 

209  The  War  Profits  Tax  is  the  difference  between  the  Excess 
Profits  Tax  and  80%  of  the  difference  between  net  income  for 
Excess  Profits  Tax  purposes  and  the  War  Profits  credit  when  such 
80%  is  greater  than  the  Excess  Profits  Tax,  otherwise,  there  is  no 
War  Profits  Tax. 

270  When  the  War  Profits  Tax  applies,  the  80%  calculation  (with- 
out deducting  the  Excess  Profits  Tax)  will  be  the  amount  of  the 
War-Excess  Profits  Tax. 

271  The  maximum  tax  is  the  limit  beyond  which  the  amount  of 
the  War-Excess  Profits  Tax  may  not  go.  This  tax,  as  a  rule,  will 
apply,  if  at  all,  only  when  the  invested  capital  is  less  than  $106,250, 
and  for  part  of  that  zone  only  (see  chart  on  page  83). 

272  As  between  the  Excess  Profits  Tax  and  War  Profits  Tax; 
whichever  is  the  higher,  will  be  the  amount  of  the  War-Excess  Profits 
Tax. 

273  As  between  the  War-Excess  Profits  and  the  Maximum  Taxes; 
whichever  is  the  lower,  will  be  the  amount  of  tax  assessable. 

274  Maximum  Tax:  Taxable 

Over  Not  Over  Zone  Rate 


The     maximum     tax     for    )  $3,000  $20,000  =     $17,000@30% 


1918  is J  20,000      net  income  =     $ ©80% 


275   For  1919  and  subsequent   |  $3,000            $20,000  =     $17,000@20% 
years J  20,000      net  income  =     $ @40% 


War-Excess  Profits  Tax  61 


War-Excess  Profits  Tax  Rates  for  1918:  276 

First  Bracket 

30  per  centum  of  the  amount  of  the  net  income  in  excess  of  the 
excess-profits  credit  (determined  under  section  312)  and  not  in 
excess  of  20  per  centum  of  the  invested  capital; 

Second  Bracket 

65  per  centum  of  the  amount  of  the  net  income  in  excess  of  20 
per  centum  of  the  invested  capital; 

Third  Bracket 

The  sum,  if  any,  by  which  80  per  centum  of  the  amount  of  the  net 
income  in  excess  of  the  war-profits  credit  (determined  under  section 
311)  exceeds  the  amount  of  the  tax  computed  under  the  first  and 
second  brackets. 

Rates  for  1919  and  Subsequent  Years: 

First  Bracket 

20  per  centum  of  the  amount  of  the  net  income  in  excess  of  the   277 
excess-profits   credit    (determined    under   section   312)    and   not   in 
excess  of  20  per  centum  of  the  invested  capital; 

Second  Bracket 

40  per  centum  of  the  amount  of  the  net  income  in  excess  of  20  per 
centum  of  the  invested  capital. 

Government  Contract  Income: 

For  1919  and  subsequent  years,  1918  War-Excess  Profits  Tax  rates    278 
shall  apply  in  such. cases  as  follows: 

Upon  the  net  income  of  every  corporation  which  derives  for 
such  year  a  net  income  of  more  than  $10,000  from  any  Government 
contract  or  contracts  made  between  April  6,  1917,  and  November  11, 
1918,  both  dates  inclusive,  a  tax  equal  to  the  sum  of  the  following: 

(1)  Such  a  portion  of  the  tax  computed  at  the  1918  rates  on  the 
entire  net  income  as  the  part  of  such  net  income  attribut- 
able to  such  contract  or  contracts  bears  to  the  entire  net 
income.  In  computing  such  tax,  the  Excess  Profits  Tax 
credit  and  War  Profits  Tax  credit  applicable  to  the  taxable 
year  shall  be  used; 

(2)  Such  a  portion  of  the  tax  computed  at  the  1919  rates  as  the 
part  of  the  net  income  attributable  to  such  Government 
contract  or  contracts  bears  to  the  entire  net  income. 

The     determination    bf    net  '  income     and    the    details     thereof,   279 
betWieen  Government  contract  income  and  income  from  other  sources, 
is  to  be  made  under  special  rules  prescribed  by  the  Commissioner 
for  that  purpose. 

The  Excess  Profits  Tax  Credit — Where  Applied: 

Excess    Profits    Tax    credit    is   to    be    applied    exclusively    under  280 
the  first  bracket  unless  it  exceeds  the  net  income  applicable  to  that 


62  War-Excess  Profits  Tax  . 

bracket,  in  which  event  the  remainder  of  such  credit  may  be  deducted 
from  the  amount  of  net  income  in  the  second  bracket. 

Railroad  Income: 

281  While  the  tax  on  such  income  is  to  be  computed  as  in  any 
other  case,  yet  because  of  the  present  peculiar  situation  of  railroads, 
under  the  Act  of  March  21,  1918,  the  tax  is  to  be  treated  as  levied 
by  an  Act  in  amendment  of  Title  II  Revenue  Act  of  1917  (see 
par.  114-122). 

282  The  specific  exemption  for  War-Excess  Profits  Tax  is  $S,000. 
When  the  tax  is  computed  for  a  period  less  than  12  months,  the 
specific  exemption  of  $3,000  is  to  be  reduced  to  an  amount  which  is 
the  same  proportion  of  $3,000  as  the  number  of  months  in  the  period 
is  of  12  months. 

Excess  Profits  Tax  Credit; 

283  The  Excess  Profits  Tax  credit  is  8%  of  the  invested  capital  for 
the  taxable  year  plus  $3,000. 

War  Profits  Tax  Credit: 

The  War  Profits  Tax  credit  is 

284  (a)    (1)  A  specific  exemption  of  $3,000. 

286  (2)   An   amount   equal   to   the   average   pre-war   net   in- 

come, plus  or.  minus  as  the  case  may  be,  10% 
of  the  difference  between  the  average  pre-war  in- 
vested capital  and  invested  capital  of  the  taxable 
year. 

The  total  amount  of  this  credit  must  always  be 
the  same  proportion  of  the  full  credit  that  the 
number  of  months  in  the  period  covered  by  the 
return  is  of  12  months. 

286  (b)  If  the  corporation  had  no  net  income  for  the  pre-war 

period,  or  if  the  amount  computed  under  (2)  above  is 
less  than  10%  of  the  invested  capital  for  the  taxable 
year,  then  the  War  Profits  credit  shall  be: 

287  (1)  A  specific  exemption  of  $3,000. 

288  (2)   10%  of  the  invested  capital  for  the  taxable  year. 

Provisional 

289  (3)  The  War  Profits  credit  shall  be  computed  as  above 

in  the  case  of  any  corporation  which  was  not  in 
existence  during  the  whole  of  at  least  one  calendar 
year  during  the  pre-war  period  if 
(a)  A  majority  of  its  stock  at  any  time  during 
the  taxable  year  is  owned  or  controlled,  di- 
rectly or  indirectly,  by  a  corporation  which 


War-Excess  Profits  Tax  63 

was  in  existence  during  the  whole  or  at  least 
one  calendar  year  during  the  pre-war  period, 
or, 

(b)  If  50%  or  more  of  its  gross  income  as  com- 
puted for  Income  Tax  consists  of  gains,  profits, 
commissions,  or  other  income,  derived  from  a 

•  Government  contract  or  contracts  made  be- 
tween April  6,  1917,  and  November  1,  1918, 
both  dates  inclusive ; 

(c)  If  the  corporation  was  not  in  existence  during 
the  whole  of  at  least  one  calendar  year  during 
the  pre-war  period  and  does  not  fall  within 
the  classification  of  "Provisional  3"  above,  the 
War  Profits  credit  shall  be : 

(1)  A  specific  exemption  of  $3,000. 

(2)  An  amount  equal  to  the  same  percentage 
of  the  invested  capital  for  the  taxable 
year  as  the  average  percentage  of  net  in- 
come to  invested  capital,  for  the  pre-war 
period,  of  corporations  engaged  in  a  trade 
or  business  of  the  same  general  class  as 
that  conducted  by  the  taxpayer,  and 
which  average  percentage  shall  be  deter- 
mined by  the  Commissioner  on  the  basis 
of  data  contained  in  returns  made  under 
Excess  Profits  Law  in  the  Revenue  Act 
of  1917  and  the  average  known  as  the 
median  shall  be  used.  The  amount  as 
herein  provided  shall  in  no  case  be  less 
than  10%  of  the  invested  capital  of  the 
taxpayer  for  the  taxable  year,  but  unless 
the  average  percentage  aforesaid  shall 
have  been  determined  and  published  at 
least  30  days  prior  to  the  time  when  such 
return  of  the  taxpayer  is  due,  then  for 
the  purpose  of  the  return  the  amount  to 
be  used  shall  be  10%  of  the  invested  capi- 
tal for  the  taxable  year.  However,  when 
such  average  percentage  is  determined,  it 
shall  be  substituted  for  the  purpose  of 
determining  the  correct  amount  of  the  tax. 
It  is  assumed  that  this  will  be  a  matter 
of  correction  in  the  office  of  the  Commis- 
sioner and  of  which  correction  the  tax- 
payer will  be  duly  and  fully  notified. 

A   foreign   corporation   shall    not  have   a   specific   exemption   of  290 
$3,000,  but  will  have  the  balance  of  credits  in  manner  and  form  as 
hereinbefore  set  out. 


64  War-Excess  Profits  Tax 


Tax  Upon  a  Combination  of  Income  from  Different  Sources: 

If  part  of  the  net  income  of  a  corporation  is  derived— 

291  (1)   From  a  trade  or  business  (or  branch  of  a  trade  or  busi- 

ness) in  which  the  employment  of  capital  is  necessary, 
and 

292  (2)  A  part  (consisting  of  not  less  than  30%  of  the  total 

net  income)  is  derived  from  a  separate  trade  or  busi- 
ness (or  a  distinctly  separate  branch  of  a  trade  or 
business)  which,  if  constituting  the  sole  trade  or  busi- 
ness would  bring  it  within  the  class  of — 

"Personal  Service  Corporations," 
then  the  tax  upon  the  first  part  of  such  net  income  shall 
be  separately  computed  (allowing  in  S4ach  computation 
only  the  same  proportionate  part  of  credits  authorized 
in  sections  311  and  312),  and  the  tax  upon  the  second 
part  of  such  net  income  shall  be  the  same  percentage 
thereof  as  the  tax  so  computed  upon  the  first  part  is 
of  the  first  part;  Provided,  that  the  tax  on  the  second 
part  shall  in  no  case  be  less  than  20*^^  thereof,  unless 
the  tax  computed  without  the  benefit  of  this  section 
would  be  less  than  20%  of  the  entire  net  income,  in 
which  event  the  entire  tax  shall  be  computed  without 
the  benefit  of  this  section  as  other  War-Excess  Profits 
taxes  are  determined.  The  total  tax  computed  under 
this  section  shall  be  subject  to  the  limitations  of  the 
maximum  tax. 

Pre- War  Period: 

293  The  pre-war  period  is  the  calendar  years  1911,  1912  and  1913. 
In  ascertaining  the  average  net  income  of  this  period,  the  returns  of 
income  as  made  within  this  period  should  show  the  correct  facts  as 
to  net  income. 

Directions  for  Computation  of  Average  Pre-War  Net  Income: 

294  For  1911-1912,  the  net  income  as  determined  by 
return  under  Section  38,  Act  August  5,  1909 $ 

Add   tax    imposed    under    this    Act    and    paid 

during  these  years $ 

For  1913,   net   income   as   determined  by   return 

under  Act  of  October  3,  1913 $ 

Add  tax  under  Act  1909  paid  in  1913 $ 

Deduct  dividends  received  from  corporations 
whose  net  income  was  subject  to  tax  under 
Act  of  1913 _$ 

Divide    result   by    number   of   years    within   the 
period. 

Average  pre-war  net  income $ 

For  the  taxable  year,  the  net  income  as  deter- 
mined under  the  Revenue  Act  of  1918 $ 


War-Excess  Profits  Tax  65 


Invested  Capital: 


Invested    capital    for    the    purpose    of    the    War    Excess    Profits  295 
Tax  is  the  sum  of  all  assets,  the  income  from  which  is  subject  to  the 
War-Excess  Profits  Tax,  valued  in  accordance  with  the  provisions 
of  Sections  325,  326,  330,  331.     These  are  designated  "admissible 
assets."    All  other  assets  are  designated  as  ''inadmissible  assets.'^ 

Computation  of  Invested  Capital: 

I.  Determine  capital  and  surplus  as  shown  on  the  books  at  290 
the  beginning  of  the  taxable  year. 

(1)  Paid  in  capital. 

(2)  Paid  in  surplus. 

(3)  Earned  surplus  or  undivided  profits,  not  including 
undivided  profits  of  the  taxable  year. 

II.  Add  (if  not  shown  on  the  books) 

Additional  value  of  tangible  property — 

(1)  (a)   Acquired    for    stock    in    excess    of    par    value, 

allowed  as  paid-in  surplus  (Par.  2,  Sect.  326). 
(b)  Acquired  out  of  earnings  but  charged  as  cur- 
rent expense  and  not  deducted  on   income  tax 
return. 

(2)  Intangible  property  paid  for  (Pars.  4  and  5,  Sect. 
326). 

(3)  Proportion  of  Inadmissible  assets  applicable  to  gain 
or  profit  subject  to  Excess  Profits  Tax  derived  from 
sale  or  other  disposition  of  such  assets  (Sect.  325). 

(4)  Proportion  of  indebtedness,  the  interest  on  which  is 
not  deductible  from  income  (Sect.  325,  Par.  2,  Sect. 
234). 

(5)  All  other  property  not  covered  by  above,  at  cost,  less 
depletion,  depreciation  or  obsolescence. 

III.  Deduct— 

(1)  Overvaluation  or  insufficient  depreciation  in  tangible 
property. 

(2)  Overvaluation  of  intangible  property  or  any  excess 
of  book  value  above  25%  of  par  value  of  total  stock 
or    shares    of   the    corporation    outstanding   at   the 

beginning   of  the   taxable   year,   or  which   shall   be 
V  in  excess  of  whichever  valuation  is  required  by  para- 

graphs 4  and  5  of  Section  326. 

(3)  Depletion,  depreciation  and  obsolescence  generally, 
necessary  to  arrive  at  true  present  value  for  Excess 
Profits  Tax  purposes,  if  not  already  cared  for. 

(4)  Amount  representing  appreciation  of  a  kind  not  sub- 
ject to  Income  Tax,  if  any  such  has  been  taken  up 
on  the  books. 

(5)  Stock  returned  to  the  corporation,  less  amounts  real- 
ized on  resale. 


66  War-Excess  Profits  Tax 

(6)  Adjustment,  if  any,  due  to  reorganization  (Sects. 
330-331). 

The  result  should  be  the  adjusted  capital  and  sur- 
plus   account   and    should    be   the    invested    capital 
under  the  Act,  subject  to  the  following: 
IV.  Deduct— 

(1)  Borrowed  capital,  if  any  included. 

(2)  A  percentage  of  invested  capital  equal  to  the  per- 
centage which  the  amount  of  inadmissible  assets  is 
of  the  amount  of  admissible  and  inadmissible  assets 
held  during  the  taxable  year. 

The  result  should  be  the  invested  capital  to  be 
used  in  computation  of  the  War-Excess  Profits  Tax. 

297  The  invested  capital  for  any  period  shall  be  the  average  in- 
vested capital  for  such  period,  but  in  the  case  of  a  corporation 
making  a  return  for  a  fractional  part  of  a  year  it  shall  (except  for 
the  purpose  of  paragraph  2  of  Section  311-A)  be  the  same  fractional 
part  of  such  average  invested  capital. 

298  The  average  invested  capital  for  the  pre-war  period  shall  be 
determined  by  dividing  the  number  of  years  within  that  period 
during  the  whole  of  which  the  corporation  was  in  existence  into  the 
sum  of  the  average  invested  capital  for  such  years. 

Adjustment  of  Invested  Capital: 

299  In  arriving  at  average  invested  capital  for  any  period,  where 
there  have  been  changes  during  such  period,  correct  result  is  ob- 
tained by  adding  or  subtracting,  as  the  case  may  be,  an  amount 
which  will  leave  the  average  for  the  entire  period,  e.  g.: 

Take  a  corporation  with  a  paid-in  capital  of $100,000 

Surplus    50,000 

Invested  capital $150,000 


On  December  31  this  corporation  declares  a  dividend  payable  to 
stockholders  of  record  February  1,  and  say  it  pays  a  dividend  of 
6%  out  of  surplus — $6,000.  In  this  case  the  entire  $150,000  would 
be  available  as  capital  for  one  month — 

$6,000  for  1  month  =  $500  for  12  months 
($6,000  X  1  month  ~  12  months) 

However,  the  $6,000  is  included  in  the  $150,000,  and  this  amount 
is  to  be  shown  on  the  return  as  the  capital  with  which  the  business 
of  the  year  was  begun.  It  is,  therefore,  necessary  to  deduct  from 
this  capital  a  sum  which  will  leave  a  sum  representing  the  average 
for  the  year.  This  result  is  obtained  by  using  as  a  multiplier  the 
number  of  months  during  the  period  covered  by  the  return  in  which 
the  $6,000  was  not  effective  as  capital,  which  is  11  months. 


War-Excess  Profits  Tax  67 


We,  therefore,  have: 

Invested  capital  at  the  beginning  of  the  taxable  year.  . $150,000 

Less  $6,000  X  H  months  —  12  months  =    5,500 

Average  invested  capital  for  the  year $144,500 

This  is  the  same  thing  as  taking  out  the  $6,000, 

leaving    $144,000 

And  then  adding  capital-equivalent  of  (the  divi- 
dend) for  the  year 500 


$144,500 


The  same  method  is  to  be  observed  in  the  addition  of  new  capital  ^qq 
within  the  year. 

It    is    interesting    to  note    that    the    Revenue    Bill    as    it    came  301 
from  Conference  and  was  passed  by  both  Houses  of  Congress  con- 
tains a  paragraph  that  dividends  paid  during  the 

"first  60  days  of  any  taxable  year  shall  be  deemed  to  have 
been  paid  from  earnings  or  profits  accumulated  during  the 
preceding  taxable  years;  but  any  distribution  made  during 
the  remainder  of  the  taxable  year  shall  be  deemed  to  have 
been  made  from  earnings  or  profits  accumulated  between 
the  close  of  the  preceding  taxable  year  and  the  date  of  dis- 
tribution, to  the  extent  of  such  earnings  or  profits   *   *   *." 

Therefore,    in    all   cases    where    dividends    are    paid    within   the  302 
first  60  days  after  the  close  of  any  taxable  year,  while  this  law 
remains  effective,  it  will  be  necessary  to  adjust  invested  capital 
accordingly  for  the  succeeding  taxable  year. 


6g War-Excess  Profits  Tax 

Illustration  of  an  Adjustment  of  Capital  Because  of  Inadmissible 

Assets 

Balance  Sheet  of  A-B  Company 

FOR  1918 

Assets 
Current 

Cash    $20,000 

Accounts   receivable    85,000 

Inventories   75,000 

$180,000 

Investments 

Stocks  and  municipal  bonds.  . .  .     $105,000 
Liberty  &  Corp.  Bonds 45,000 

150,000 

Plant  Assets 

Buildings,  etc 125,000 

Good-will,  patents,  etc.,  acquired  in  1912. .  55,000 

$510,000 
Liabilities 

Accounts   payable    $60,000 

Mortgage 50,000 

110,000 

Excess  of  assets,  or  net  worth  ^         $400,000 
Represented  by: 

Capital  stock $250,000 

Surplus  at  beginning  of  year. .  .         50,000 
Profits  of  taxable  year 100,000 

$400,000 


Adjustment  of  Capital 

Capital,  from  the  Balance  Sheet,  appears  to  be $300,000.00 

Good-will,  etc.,  purchased  prior  to  March  3),  1917: 

(a)  Actual  cash  value  at  time  of  purchase.     $55,000 

(b)  Par  value  of  shares  issued  for 55,000 

(c)  259;,  of  $250,000  (total  shares  outstand- 
ing March  3,  1917) 62,500 

As  the  amount  at  which  good-will  is  included 
in  capital  is  the  lower  of  the  three  tests,  let 
it  stand. 

Income  from  stock  and  municipal  bonds  is 
not  subject  to  Excess  Profits  Tax.  They  are, 
therefore,  inadmissible  assets,  and  capital 
must  be  adjusted  on  that  account  as  pro- 
vided in  Section  326  (c). 


War-Excess  Profits  Tax  69 


Total  capital  assets   (not  including  profits  of 

taxable  year)    $410,000 

Total  inadmissible  assets   105,000 

$105,000  X  $300,000  =  76,829.27 


$410,000 


Invested  Capital  for  Tax  =  $223,171.73 


Form  of  Balance  Sheet  for  Income  Tax  and 

War  Excess  Profits  Tax 
Assets 
Current  assets: 

Cash $0 

Notes  and  accounts  payable 0 

Inventories   0  $0 

Deferred  charges  to  operations : 

•Prepaid    insurance,    etc 0 

Plant  assets : 

Real  estate 0 

Machinery,  fixtures,  etc 0  0 

Good  will,  patents,  etc 0 


Total $0 

Liabilities 

Notes   payable $0 

Accounts  payable 0 

Accrued  wages 0  $0 

Bonded  debt 0 

Mortgages 0  0 

Reserves 0  0 


$0 

Excess  of  Assets 

(Or  Net  Worth) 

resented  by: 

Capital  stock 

$0 

Surplus  (or  deficit) . 

0 

$0 

$0 
As  undivided  profits  of  the  taxable  year  must  not  be  included  in 
Invested  Capital,  such  profits,  as  shown  by  the  Profit  and  Loss  State- 
ment, must  (if  they  are  included)  be  deducted  from  total  assets  to 
ascertain  the  capital  which  is  to  be  adjusted,  or  used  without  adjust- 
ment, as  the  case  may  be. 


70  War-Excess  Profits  Tax 


Only  reserves  which  have  not  been  used  as  a  deduction  against 
income  in  returns  of  income  may  be  used  as  invested  capital.  If 
reserves  or  any  part  thereof  have  been  deducted  from  income  in 
ascertaining  net  income  subject  to  taxation,  the  amount  so  used 
must  be  subtracted  in  the  adjustment  of  capital  for  the  purpose  of 
the  tax. 

The  foregoing  form  is  in  outline  only  and  intended  to  give  the 
idea  of  form  rather  than  to  be  all  inclusive  as  to  items.  With  the 
suggestions  we  give,  even  those  not  familiar  with  the  construction 
of  Balance  Sheets  should  be  able  to  have  a  better  understanding 
of  what  is  required  for  the  purpose  of  the  tax. 

The  Profit  and  Loss  Statement  is  simply  a  statement  of  gross 
income,  deductions  and  exemptions.  The  Income  Tax  return  will 
answer  for  this  purpose. 

When  Tax  Is  To  Be  Assessed  on  Basis  of  Experience  of  Representa- 
tive Corporations: 

303  The  provisions  in  the  Revenue  Act  of  1918  similar  to  the 
situation  provided  for  by  Section  210  of  the  Revenue  Act  of  1917, 
are  to  be  found  in  Sections  327  and  328  of  the  new  law.  Four  classes 
of  cases  are  provided  for  in  which  the  tax  on  the  net  income  of 
the  taxpayer  is  to  be  the  same  proportion  of  his  net  income  as  the 
average  tax  of  representative  corporations  engaged  in  a  like  or 
similar  trade  or  business  is  of  their  average  net  income. 

The  cases  are : 

304  (1)  Where  the  Commissioner  is  unable  to  determine  in- 

vested capital  as  provided  in  Section  326; 

305  (2)  In  the  case  of  a  foreign  corporation ; 

306  (3)  Where   a   mixed   aggregate   of  tangible   property   has 

been  paid  in  for  stock  or  stock  and  bonds  and  the 
respective  values  of  the  several  classes  of  property 
cannot  be  satisfactorily  determined  or  the  classes  of 
property  cannot  be  satisfactorily  distinguished. 

307  (4)  Where,  if  the  War  Excess  Profits  Tax  were  computed 

as  generally  provided,  the  result  would  work  upon  the 
corporation  an  exceptional  hardship  as  evidenced  by 
gross  disproportion  between  the  tax  so  computed  and 
the  tax  so  computed  on  the  net  income  of  representa- 
tive corporations. 

A  provision  is  made,  however — 

(1)  That  if  the  tax  computed  as  generally  pro- 
vided for,  is  high  as  compared  with  represen- 
tative corporations  merely  because  the  corpor- 
ation under  consideration  earns  within  the 
taxable  year  a  high  rate  of  profits  upon  a 
normal  invested  capital,  then  Section  328  will 
not  apply,  nor 


War-Excess  Profits  Tax  71 


(2)  If  50%  or  more  of  the  gross  income  of  such 
corporation  for  the  taxable  year  (computed 
for  Income  Tax)  consists  of  gains,  profits, 
commissions,  or  other  income,  derived  on  a 
cost-plus  basis  from  a  Government  contract 
or  contracts  made  between  April  6,  1917,  and 
November  11,  1918,  both  dates  inclusive. 

Provision  is  also  made  that  if  tax  is  to  be  assessed  under  gQg 
section  328,  if  the  tax  computed  as  generally  provided  for  is  less 
than  50%  of  the  net  income,  the  tax  assessed  shall  be  50%  of  the 
net  income;  but  if  the  tax  computed  as  generally  provided  is  50% 
or  more  of  the  net  income,  the  installments  shall  in  the  first  instance 
aggregate  50%  of  the  net  income.  In  any  case,  the  actual  ratio 
when  determined  shall  be  used  in  determining  the  correct  amount  of 
tax.  If  the  aggregate  amount  of  tax  when  actually  determined  shall 
exceed  50%,  such  excess  shall  on  notice  and  demand  by  the  Collector 
be  paid  together  with  interest  at  the  rate  of  V2  of  1%  per  month 
from  the  time  the  installment,  or  installments,  was  due. 

In  cases  (1),  (3),  (4),  (%  304,  306,  307)  the  ratio  is  to  be  determined   399 
after  deducting  the  specific  exemption  of  $3,000.     In  the  case  of  a 
foreign  corporation   (2)    (•:305),  the  tax  is  to  be  computed  without 
deducting   the   specific   exemption   either   for  the  taxpayer  or  the 
representative  corporations. 

Reorganizations : 

In  case  of  reorganization,  consolidation,  or  change  of  owner-  310 
ship,  after  January  1,  1911,  of  a  trade  or  business  now  carried  on  by 
a  corporation,  the  corporation  shall  be  deemed  to  have  been  in  ex- 
istence prior  to  that  date  and  the  net  income  and  invested  capital 
of  its  predecessor  for  all  or  any  part  of  the  pre-war  period  prior  to 
the  organization  of  the  corporation  now  carrying  on  such  trade  or 
business  shall  be  deemed  to  have  been  the  net  income  and  invested 
capital  of  such  corporation.  If  predecessor  trade  or  business  was 
carried  on  by  an  individual  or  partnership,  the  net  income  for  the 
pre-war  period  shall  be  ascertained  as  nearly  as  may  be  upon  the 
same  basis  and  in  the  same  manner  as  provided  for  corporations  foi 
Income  Tax,  including  a  reasonable  deduction  for  salary  or  compen- 
sation to  the  partners  or  individuals  for  personal  service  rendered. 

In  the  case  of  organization  before  July  1,  1919,  of  a  trade  or  311 
business  in  which  capital  is  a  material  income-producing  factor 
and  which  was  previously  owned  by  an  individual  or  partnership, 
the  net  income  of  such  trade  or  business  from  January  1,  1918,  to 
the  date  of  such  organization  may,  at  the  option  of  the  individual 
or  partnership,  be  taxed  as  the  net  income  of  a  corporation  is  taxed 
for  both  Income  and  Excess  Profits  Tax;  in  which  event  the  net 
income  and  invested  capital  of  such  trade  or  business  shall  be 
computed  as  if  such  corporation  had  been  in  business  on  and  after 
January  1,  1918,  and  the  undivided  profits  or  earnings  of  such  trade 


7^  War-Excess  Profits  Tax 


or  business  shall  not  be  subject  to  the  surtax  imposed  by  Section 
211,  but  amounts  distributed  en  or  after  January  1,  1918,  from  the 
earnings  of  such  trade  or  business  shall  be  taxed  to  the  recipients 
as  dividends  and  all  the  provisions  of  Titles  II  and  III  of  the 
Revenue  Act  of  1918  shall,  so  far  as  applicable,  apply  to  such  trade 
or  business:  Provided,  that  this  provision  shall  not  apply  to  any 
case  the  net  income  of  which  for  the  taxable  year  1918  v^as  less 
than  209(  of  the  invested  capital  for  such  year:  Provided  further, 
that  any  taxpayer  v^^ho  takes  advantage  of  this  provision  shall  pay 
the  Capital  Stock  Tax  imposed  by  the  Revenue  Act  of  1918  and  the 
Revenue  Act  of  1916,  as  if  such  taxpayer  had  been  a  corporation  on 
and  after  January  1,  1918,  with  a  capital  stock  having  no  par  value. 

312  If  any  asset  (of  the  trade  or  business)  in  existence  both  dur- 
ing the  taxable  year  and  any  pre-war  period  is  included  in  the  in- 
vested capital  for  the  taxable  year,  then  it  must  be  included  in  the 
invested  capital  for  such  pre-war  period,  and  the  computation  of 
invested  capital  for  such  pre-war  period  shall  be  on  the  same  basis 
employed  in  determining  the  invested  capital  for  the  taxable  year. 
Any  readjustments  necessary  to  effect  this  result  shall  be  made. 

313  In  the  case  of  reorganization,  consolidation,  or  change  of 
ownership  of  property  after  March  3,  1917,  if  an  interest  or  control 
in  such  trade  or  business  or  property  of  50%  or  more,  remains  in 
the  same  persons,  or  any  of  them,  then  no  asset  received  or  trans- 
ferred from  the  present  owner  shall,  for  the  purpose  of  determining 
invested  capital,  be  allowed  a  greater  value  than  would  have  been 
allowed  under  this  Title  in  computing  the  invested  capital  of  such 
previous  owner  if  such  asset  had  not  been  transferred  or  received: 
Provided,  that  if  such  previous  owner  was  not  a  corporation,  then 
the  value  of  any  asset  so  transferred  or  received  shall  be  taken  at 
its  cost  of  acquisition  (at  the  date  when  acquired  by  such  previous 
owner)  with  proper  allowance  for  depreciation,  impairment,  better- 
ment or  development,  but  no  addition  to  the  original  cost  shall  be 
made  for  any  charge  or  expenditure  deducted  as  expense  or  otherwise 
on  or  after  March  1,  1913,  in  computing  the  net  income  of  such 
previous  owner  for  the  purpose  of  taxation. 

Section  335  Tax  for  Fiscal  Year  with  Different  Rates: 
814        (a)  That  if  a  corporation  (other  than  a  Personal  Service  Corpo- 
ration) makes  return  for  a  fiscal  year  beginning  in  1917  and 
ending  in  1918,  the  War  Excess  Profits  Tax  for  the  first  tax- 
able year  shall  be  the  sum  of: 

(1)  The  same  proportion  of  a  tax  for  the  entire  period  com- 
puted under  Title  II  of  the  Revenue  Act  of  1917  which 
the  portion  of  such  period  falling  within  the  calendar 
year  1917  is  to  the  entire  period,  and 

(2)  The  same  proportion  of  a  tax  for  the  entire  period  com- 
puted under  this  Title  at  rates  specified  in  Section  301(a) 
which  the  portion  of  such  period  falling  within  the 
calendar  year  1918  is  to  the  entire  period; 


War-Excess  Profits  Tax  73 

Any  amount  heretofore  or  hereafter  paid  on  account  of  the  315 
tax  imposed  for  such  fiscal  year  by  Title  II  of  the  Revenue 
Act  of  1917  shall  be  credited  toward  the  payment  of  the  tax 
imposed  for  such  fiscal  year  by  this  title,  and  if  the  amount 
so  paid  exceeds  the  amount  of  the  tax  imposed  by  this  title, 
the  excess  shall  be  credited  or  refunded  to  the  corporation 
in  accordance  with  the  provisions  of  Section  252. 

(b)  If  a  corporation  makes   return  for  a  fiscal  year  beginning  31G 
in  1918  and  ending  in  1919,  the  tax  for  such  fiscal  year  under 
this  title  shall  be  the  sum  of; 

(1)  The  same  proportion  of  a  tax  for  the  entire  period  com- 
puted under  subdivision  (a)  of  Section  301  (War  Excess 
Profits  Tax  for  1918)  which  the  portion  of  such  period 
falling  within  the  calendar  year  1918  is  to  the  entire 
period,  and 

(2)  The  same  proportion  of  a  tax  for  the  entire  period  com- 
puted under  subdivision  (b)  of  Section  301  (War  Excess 
Profits  Tax  for  1919)  which  the  portion  of  such  period 
falling  within  the  calendar  year  1918  is  to  the  entire 
period. 

(c)  If  a  partnership  or  Personal  Service  Corporation  makes  re-   3^7 
turn  for  a  fiscal  year,  beginning  in  1917  and  ending  in  1918, 

it  shall  pay  the  same  proportion  of  a  tax  for  the  entire  period 
computed  under  Title  II  of  the  Revenue  Act  of  1917,  which  the 
portion  of  such  period  falling  within  the  calendar  year  1917 
is  of  the  entire  period. 

Any   tax   paid   by   a    partnership    or   Personal    Service    Corpora-  gig 
tion  for  any  period  beginning  on  or  after  January  1,  1918,  shall  be 
immediately  refurided  to  the  partnership  or  corporation   as   a  tax 
erroneously  or  illegally  collected. 

Tax  Paid— When: 

The  War  Excess  Profits  Tax  shall  be   paid  at  the   same  times  319 
and  places,  in  the  same  manner,  and  subject  to  the  same  conditions, 
as  provided  for  Income  Tax  and  all  the  provisions  for  Income  Tax, 
including  penalties,  are  made  applicable  in  case  of  the  War  Excess 
Profits  Tax. 

Maximum  Tax  on  Profits  from  Sale  of  Mines,  Oil  and  Gas  Wells: 

In  the  case  of  a  bona  fide  sale  of  mines,  oil  or  gas  wells,  or  32O 
any  interest  therein,  where  the  principal  value  of  the  property  has 
been  demonstrated  by  prospecting  or  exploration  and  discovery  work 
done  by  the  taxpayer,  the  portion  of  the  War  Excess  Profits  Tax 
attributable  to  such  sale  shall  not  exceed  20%  of  the  selling  price  of 
such  property  or  interest. 


INSTRUCTIONS 
FOR  USE  OF  TABLES  1  AND  2  FOR  TAX  ON  INDIVIDUAL 

INCOME 

EXAMPLE: 

A  married  man  without  dependents  has  a  net  income;  all  sub- 
ject to  Normal  and  Surtax $51,000 

From  the  column  of  total  tax,  with  exemption  of  $2,000,  we 
find  the  tax  for  $50,000  to  be $11,030 

The  next  higher  Surtax  rate  is 24% 

Add  Normal  Tax  rate 12% 

36% 
The  additional  $1,000  at  36% 360 

Total  tax $11,390 

If  the  tax  be  calculated  in  detail,  we  have : 

Total  net  income $51,000 

Less  exemption 2,000 

Amount  of  income  subject  to  Normal  Tax $49,000 

$  4,000  at    6% $240 

$45,000  at  12% 5400 

Normal  Tax $5,640 

From  Surtax  table,  we  find  tax  on  $50,000  to  be ... .      $5,510 

$1,000  at  24% ,  .  240        5,750 

Total  tax $11,390 

The  Normal  Tax  and  Surtax  tables  may  be  taken  separately,  or  in 
any  combination  desired. 

The  method  is  the  same  for  the  1919  table. 


74 


Tables  and  Charts 


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TABLE  III 

CALCULATION  OF  TAX  WHERE  RATES  FOR  DIFFERENT 
CALENDAR  YEARS  APPLY 

(a)  In  the  case  of  a  partnership,  under  Sec.  218  (b)  and  Sec.  206 
of  the  statute,  both  the  normal  and  surtax  will  be  involved  in  the  per- 
sonal returns  of  the  partners — 

(1)  The  normal  tax  at  the  rates  for  the  years  involved. 

(2)  The  surtax  in  accordance  with  the  method  prescribed  be- 

low. 

(b)  Stock  Dividends,  received  in  1918  or  before  30  days  after  the 
passage  of  the  Revenue  Act  of  1918,  are  required  to  be  allocated  to  the 
years  in  which  was  accumulated  the  earnings  out  of  which  the  dividend 
was  paid — if  any  year  other  than  the  taxable  year  is  involved.  All 
earnings  of  the  taxable  year  1918  being  disposed  of  and  all  or  any  part 
of  earnings  back  to  March  1,  1913,  being  capitalized  by  means  of  the 
Stock  Dividend,  we  have  recourse  to  the  following  method  for  purpose 
of  the  surtax. 

SURTAXES  FOR  1913,  1914,  AND  1915 

Rates 

$20,000  to  $50,000 1% 

50,000  to  75,000 2 

75,000  to  100,000 3 

100,000  to  250,000 4 

250,000  to  500,000 5 

Above  $500,000,  G  per  cent. 

SURTAXES  FOR  1916 

$20,000  to  $40,000 1%      200,000  to  250,000 7% 

40,000  to  60,000 .....  2       250,000  to  300,000 8 

60,000  to   80,000 3       300,000  to  500,000 9 

80,000  to  100,000 4       500,000  to  1,000,000 10 

100,000  to  150,000 5  1,000,000  to  1,500,000 11 

150,000  to  200,000 6  1,500,000  to  2,000,000 12 

Above  $2,000,000,  13  per  cent. 

SURTAX  FOR  1917 

$5,000  to  $7,500 1%    100,000  to  150,000 27 

7,500  to  10,000 2      150,000  to  200,000 31 

10,000  to  12,500 3      200,000  to  250,000 37 

12,500  to  "15,000 4      250,000  to  300,000 42 

15,000  to  20,000 5      300,000  to  500,000 46 

20,000  to  40,000 8      500,000  to  750,000 50 

40,000  to  60,000 12      750,000  to  1,000,000 55 

60,000  to  80,000 17  1,000  000  to  1,500,000 61 

80,000  to  100,000 22  1,500,000  to  2,000,000 62 

Over  $2,000,000,  63  per  cent. 

(Table  III  continued  on  page  82) 
See  Table  I  for  1918  Surtaxes.     See  Table  II  for  Surtax  1919  and  subsequent  years 


S2 


Tables  and  Charts 


EXAMPLE: 


TABLE   III— Continued 


A  married  man,  with  a  net  income  of  $125,000. 

Subject  to  normal  and  surtax  at  1918  rates $50,000 

A  stock  dividend  of 75,000 


The  tax  at  1918  rates  on  $50,000  is 


Total  tax 
$11,030 


Stock  Dividend  allo- 
cated as  follows : 


1913 
to  1915 


$25,000 


1916 


$20,000 


1917 


$30,000 


We  now  take  the  years  in  reverse  order.  We  begin 
with  the  amount  taxable  at  1918  rates 

Comparing  this  with  1917  table,  it  falls  in  the  12% 
zone  ($40,000  to  $60,000).  The  difference  be- 
tween the  beginning  amount  and  end  of  this  zone 
is  ($50,000  to  $60,000)  $10,000  @  12%  =  $1,200 
The  balance  ($30,000— $10,000)  falls  in  the  next 
higher  1917  zone 20,000  @  17%  =  3,400 


Beginning  point  for  1916  tax 

We  now  take  up  the  1916  amount  of  $20,000: 
By  comparison  with  1916  table,  it  falls  in  4%  zone 
($80,000  to  $100,000)        ....  $20,000  @  4%  =  $800 


Beginning  point  for  1913-1915  tax        

We  now  take  up  the  1913-1915  amount  of  $25,000: 
By  comparison  with  1913-15  table,  this  falls  in  4% 
zone  ($100,000  to  $250,000)  $25,000  @  4%  =  $1000 


1918 


Net 
Income 


$50,000 


30,000 


$80,000 


20,000 


$100,000 


25,000 


$125,000  $17,430 


4,600 


800 


1,000 


Tables  and  Charts 


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84 


Tables  and  Charts 


INSTRUCTIONS  AND  ILLUSTRATION  FOR  USE  OF  DECIMAL 
TABLE  FOR  CALCULATION  OF  WAR-EXCESS  PROFITS 

TAX 

Take  a  capital  of  $100,000.     Net  income  of $25,000 

Excess  Profits  Credit :  8%  of  Capital  =  $8,000  plus  $3,000  =  . . .      11,000 
Excess  Profits  Tax: 

%  of  income  to  capital,  25%.    Opposite  this  %  in 
table  find  in  Excess  Profits  Tax  column  the 

rate  of  tax  on  capital  to  be 0685 

1st 
and  2nd 
brackets 


%  of  exemption  to  capital,  11%.  Opposite  11%  in 
table  we  find  in  Excess  Profits  Tax  column  the 
equivalent  rate  of  exemption  on  capital 


009 


Taxable  rate  on  capital 0595 


CALCULATION: 
$100,000  X. 0595= $5,950 

War  Profits  tax: 

10%  of  capital  =  $10,000  plus  $3,000=  (War  Profits  Cr.)  $13,00D= 
;13%  of  capital. 

Opposite  %  of  income  on  capital  (25%),  in  War 

_  profits  Tax  column  find  rate  of  tax  on  capital . .        .12 

"**"{}     i     ,     • 

Opposite  %  of  credit  on  capital  (13%)  find  in  War 

'"\     profits  Tax  column  rate  of  exemption  on  capital       .  024 


3rd-; 


Taxable  rate  on  capital  for  War  Profits  Tax . 
CALCULATION: 

$100,000 X. 096=  .  . .:    $9,600 

Less  Excess  Profits  Tax 5,950 


.096 


War  Profits  Tax $3,650 

Add  Excess  Profits  Tax 5.950 


War-Excess  Profits  Tax: 


f'T 


$9,600 


Under  the  rule  that  as  between  the  sum  of  the  (1st  and  2nd  brack- 
ets) and  the  3rd  bracket, the  tax  assessable  is  the  higher  of  the  two  unless 
the  maximum  tax  applies,  the  calculation  here  would  stop  with  deter- 
mination of  tax  under  the  3rd  bracket  without  carrying  the  operation 
further.  The  next  thing  is  a  comparison  of  the  higher  of  these  two  taxes 
with  the  maximum  tax. 


Tables 'AisfD  Charts  85 


THE  MAXIMUM  TAX: 

$  3,000  to  $20,000  =  $17,000  @  30%= $5,100 

$20,000  to  $25,000  =  $  5,000  @  80% 4,000 


Maximum  Tax $9,100 

As  the  maximum  tax  is  less  than  the  War  Excess 

Profits  Tax $9,600 

the  maximum  tax  is  the  amount  of  War  Tax  assessable. 

Instead  of  calculating  the  maximum  tax,  a  glance  at  Table   V 

would  show  $9,100  as  the  maximum  tax  for  an  income  of  $25,000. 

Still  further  simplifying  the  calculation  of  tax,  an  inspection  of  the 

chart  of  tax  zones  shows  that  an  income  of  25%  on  a  capital  of  $100,000 

falls,  for  tax,  in  the  maximum  tax  zone.     It  is,  therefore,  unnecessary 

to  calculate  any  other  tax. 

PROOF  OF  THE  FOREGOING: 

Take  a  capital  of  $100,000.     Net  income  of  $25,000. 
20%o  of  capital  =  $20,000 

8%  of  capital=     8,000+$3,000= $11,000 

EXCESS  PROFITS  TAX 

$20,000-$ll,000  =  $9,000  @^  30%,= $2,700 

5,000 @65%)= 3,250 


$5,950 
WAR  PROFITS  TAX 

Credit=  10%  of  capital  =  $10,000 +$3, 000= $13,000 

Net  Income     Credit 

$25,000  -  $13,000  =  $12,000  @  80%= $9,600 


If    average    prewar    income   be $13,000 

Average  prewar  capital  be 75,000 

•New  capital  put  in 25,000 

THEN  WAR  PROFITS  CREDIT  WOULD  BE: 

Specific  exemption $3,000 

Average  prewar  income 13,000 

Add  10%  of  new  capital 2,500 

$18,500 
This  credit  is  18.5%  of  capital. 
Referring  to  decimal  table: 

The  rate  of  tax  on  capital  for  an  income  of  25%  is .  .          .12 
The  rate  of  exemption  for  18.5%  of  capital  is 068 

Net  rate  of  tax  on  capital .  052 

$100,000  X. 052= $5,200 

Proof: 

$25,000 -$18,500  =  $6,500  @  80%= $5,200 

Table  III  for  War  Excess  Profits  Tax. 
Table  V  for  Maximum  Tax. 


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